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A research report submitted to the Faculty of Commerce, Law and Management,
University of Witwatersrand, Johannesburg, in partial fulfilment of the requirements for the
degree of Master of Commerce (Specialising in Taxation)
VAT TREATMENT OF FINANCIAL SERVICES: A COMPARATIVE
ANALYSIS BETWEEN METHODOLOGIES APPLIED IN SOUTH AFRICA
AND OTHER TAX JURISDICTIONS
Applicant: Perushka Moodley
Student number: 939727
Supervisor: Mr Roy Blumenthal
Head of School: Professor N Padia
Degree: Master of Commerce (specialising in Taxation)
Date: 31 March 2016
2
DECLARATION:
I declare that this research report is my own unaided work. It is submitted for the degree of
Master of Commerce at the University of the Witwatersrand, Johannesburg. It has not
been submitted for any other degree or examination at any other university.
______________________
Perushka Moodley
3
TABLE OF CONTENTS
ABSTRACT...................................................................................................................................................... 5
CHAPTER 1: INTRODUCTION .................................................................................................................... 6
1.1. Background .................................................................................................................................... 6
1.2. Research problem ......................................................................................................................... 8
1.3. The sub-problems ......................................................................................................................... 9
1.3.1. Is there a legitimate need to revise the current VAT treatment of financial services in
South Africa?................................................................................................................................................ 9
1.3.2. Conceptually, does a better method exist to tax financial services from a VAT
perspective in South Africa? ...................................................................................................................... 9
1.3.3. How will a potential new method impact the financial service providers, SARS,
consumers etc.? ........................................................................................................................................ 10
1.4. Purpose of the research ............................................................................................................ 10
1.5. Significance of the study .......................................................................................................... 11
1.6. Scope.............................................................................................................................................. 11
1.7. Limitations .................................................................................................................................... 12
1.8. Methodology ................................................................................................................................. 12
CHAPTER 2: VAT ON FINANCIAL SERVICES IN SOUTH AFRICA ................................................. 13
2.1. Introduction of VAT in South Africa ....................................................................................... 13
2.2. The VATCOM report ................................................................................................................... 14
2.3. Implementation of VAT in South Africa ................................................................................. 14
2.4. Subsequent amendments to the SA VAT Act ...................................................................... 15
2.5. Appointment of the Katz Commission .................................................................................. 17
2.6. Current SA VAT legislation....................................................................................................... 19
CHAPTER 3: CRITICAL ANALYSIS OF THE SA VAT EXEMPTION METHOD .............................. 21
3.1. The underlying nature of financial services ........................................................................ 21
3.2. Basic principles of a VAT system ........................................................................................... 23
3.3. Weaknesses identified with the exemption method: ......................................................... 26
4
CHAPTER 4: CURRENT MECHANISMS IN PLACE TO REDUCE VAT COSTS IN SOUTH
AFRICA .......................................................................................................................................................... 34
4.1. Taxation of explicit finance charges ...................................................................................... 34
4.2. Agreement of an alternative method of apportionment to claim input tax deductions
on mixed expenses. ................................................................................................................................ 35
CHAPTER 5: VAT ON FINANCIAL SERVICES IN OTHER TAX JURISDICTIONS ........................ 49
5.1. Taxing financial services at the standard rate .................................................................... 49
5.2. Zero-rating option: New Zealand ............................................................................................ 56
5.3. Australia- Reduced input tax credit ....................................................................................... 65
5.4. EU/UK VAT Grouping provisions ............................................................................................ 70
CHAPTER 6: CONCLUSION ...................................................................................................................... 76
REFERENCES .............................................................................................................................................. 85
5
ABSTRACT
The taxation of financial services is challenging from a Value-Added Tax (VAT)
perspective. Conceptually, VAT should apply to any fee for services but where
financial services are concerned, there is difficulty in quantifying the value-added by
these institutions. According to the First Interim Report on Value-Added Tax for the
Minister of Finance (the Davis Tax Committee report) most jurisdictions have
therefore opted to exempt financial services from VAT.
In South Africa, financial services are exempt from VAT, however, where an explicit fee is
charged as consideration for a supply, it will be taxed. The South African VAT legislation
provides for the denial of input tax on costs incurred to generate exempt supplies. The
burden of an irrecoverable VAT cost exposes the financial industry to hindrances such as
vertical integration and tax cascading.
Certain VAT jurisdictions have however implemented policies to reduce the overall cost of
financial institutions. This study will therefore analyse the alternate VAT methods to
determine whether a more viable mechanism of taxing financial services in South Africa,
exists.
Key words:
Apportionment, cascading, implicit fees, input tax, efficiency, exemption, explicit fees,
equity, full taxation approach, neutrality, simplicity, standard rate, reduced input tax credit,
value-added, VAT grouping, vertical integration, zero-rating
6
CHAPTER 1: INTRODUCTION
1.1. Background
In September 1991, VAT was introduced as a broad-based indirect tax on the
consumption of goods and services in South Africa. This introduction resulted in
most supplies of goods or services attracting VAT however certain exemptions
from VAT were also promulgated.
In the South African Report of the Value-Added Tax Committee (the VATCOM
report), signed 19 February 1991, the committee had stated that although
theoretically, there did not appear to be any reason as to why financial services
were not subject to VAT (that is, financial services were consumption expenditure
just like any other services), due to the practical and conceptual complexities,
financial services were exempted from VAT.
It was only a few years later, following the Third Interim Report of the Commission
of Inquiry into Certain Aspects of the Tax Structure of South Africa (the Katz
Commission report) that a wider range of financial services where an explicit fee
was charged as consideration for a supply, was brought into the VAT net. It was
considered unjustifiable to treat these services as being different from other
administration or professional services.
This amendment signalled a fundamental shift in South Africa’s taxation
landscape. Implicit fees however, (that is, fees for services provided which are not
separately identifiable but included rather as part of the interest margin or
investment return) were still exempted from VAT due to valuation difficulties.
In terms of the South African Value-Added Tax Act 89 of 1991 (SA VAT Act), the
basic principles for claiming input tax deductions are as follows:
7
where expenses are wholly incurred to generate taxable supplies, a full input
tax deduction is permitted;
where expenses are wholly incurred to make exempt supplies, no input tax
deduction is permitted; and
where costs are incurred to make both taxable and exempt supplies (that is,
mixed costs), in the event that the de minimis rule does not apply, input tax
recovery is restricted to an apportioned rate.
(Note: the de minimus rule allows for a full input tax deduction where taxable
use is equal to or greater than 95 percent of the total use or consumption).
As South African banks generate significant values of exempt supplies, the de
minimus rule is generally not met. Consequently, South African banks are required
to restrict their input tax deductions to an apportioned rate.
Where a supplier of financial services cannot recover the VAT paid on its services,
the irrecoverable VAT forms part of the cost. It may choose to either raise the
price of its services, absorb the VAT cost or find another way of delivering the
same service without the VAT cost.
In July 2013, the Minister of Finance announced the appointment of the Davis Tax
Committee to investigate the South African tax policy framework, and its role in
supporting the objectives of inclusive growth, employment, development and fiscal
sustainability.
The Davis Tax Committee report released in July 2015 reiterated that the taxation
of financial services continued to challenge VAT design due to the cost of
cascading. Cascading, better explained, is where further tax is paid on an already
taxed goods or services with no credit for taxes paid previously. The tax is included
8
into the final price to consumers on which additional tax is charged, that is, a tax on
a tax occurs.
The Davis Tax Committee also found that financial institutions were not
incentivised to outsource certain administrative functions to third-party service
providers due to the additional VAT cost it would incur. It would therefore seek to
undertake the required services itself (vertical integration) which has the effect of
reducing competition, specialisation and potentially growth in the South African
economy.
1.2. Research problem
Is the current method of taxing financial services from a VAT perspective in South
Africa the most appropriate, given the identified limitations of cascading and
vertical integration?
As the financial services industry plays a significant role in the South African
economy, the large VAT cost burden placed upon financial service providers and
the negative effects of cascading and vertical integration is worrisome to both the
financial services industry and the South African Revenue Service (SARS).
Certain tax jurisdictions for example Australia, New Zealand and the United
Kingdom (UK) have however managed to introduce policies which mitigate the
additional VAT costs.
This research will therefore delve into the current VAT treatment of financial
services in South Africa and will analyse the alternate VAT methods adopted in the
above mentioned VAT jurisdictions to determine whether a revision in South
African VAT policy is required.
9
1.3. The sub-problems
1.3.1. Is there a legitimate need to revise the current VAT treatment of financial
services in South Africa?
The first sub-problem is to evaluate the design of the current VAT treatment
of financial services in South Africa. This will look at the history of VAT on
financial services in South Africa. Further, the study will analyse the
weaknesses in the current system including whether the exemption applied
is consistent with the underlying principles of neutrality, efficiency, simplicity
and fairness of a VAT system.
In addition, a critical analysis of the current mechanisms in place to alleviate
some of the VAT burden in South Africa will be performed. This will include
an analysis of the reasonability and appropriateness of the class ruling
issued by SARS to the Banking Association of South Africa (BASA)
regarding the agreed alternative method of VAT apportionment to be applied
by the applicants to such request.
1.3.2. Conceptually, does a better method exist to tax financial services from a VAT
perspective in South Africa?
The second sub-problem is the crux of the study. The task here is to
compare and contrast alternative VAT methods in other tax jurisdictions to
determine whether a more appropriate method exists to taxing financial
services in South Africa, from a VAT perspective.
An analysis of the following tax jurisdictions will be performed:
New Zealand - As the South African VAT Act mirrors that of New
Zealand’s Goods and Services Tax (GST) regulations in many ways as
10
both taxes are similar, the zero-rated VAT treatment of financial services
in New Zealand will be analysed.
Australia- Moving across the Tasman Sea, the Australian Government
introduced the Reduced Input Tax Credit method to curb the effects of
vertical integration and cascading which were identified as being the
fundamental weaknesses of the South African VAT treatment of financial
services; and
United Kingdom - UK VAT grouping rules were also implemented to
eliminate the effects of cascading and the incentive for vertical integration
specifically with regards to intra-group supplies and therefore is of
interest to this study.
1.3.3. How will a potential new method impact the financial service providers,
SARS, consumers etc.?
The third sub-problem will stem from the results of the above analysis. If a
more viable method of taxing financial services in South Africa exists, an
analysis will be performed in theory to consider the potential impact of a new
method on the economy.
1.4. Purpose of the research
This research report will give an overview of the current method of exempting
financial services from VAT in South Africa and its weaknesses in relation thereto.
It will also address current SARS practices put in place to limit the VAT burden
placed on financial service providers. By analysing the VAT treatment adopted in
alternate VAT jurisdictions, this study will provide the reader with further insight as
to whether a more suitable approach to taxing financial services in South Africa
exists for further consideration by South African policy makers.
11
1.5. Significance of the study
Following the Davis Tax Committee report released in July 2015, the current
method of exempting financial services from VAT in South Africa has resulted in
negative effects of tax cascading and vertical integration. The Davis Tax
Committee recommended that alternative methods to reduce the VAT cost in the
financial services industry should be further investigated.
In response thereto, this study provides the much needed analysis of alternative
VAT methods adopted by other jurisdictions to taxing financial services, the
primary intention of the study being to determine whether a revision in South
African VAT policy is required.
1.6. Scope
The scope of this study will focus on:
An analysis of the history of VAT on financial services in South Africa;
It will consider the underlying nature of financial services and the
appropriateness of the VAT exemption applied in relation thereto;
A review of the alternative method of apportionment agreed between SARS
and BASA; and
A review of the VAT treatment of financial services in the following tax
jurisdictions: New Zealand, Australia and UK. These VAT jurisdictions have
implemented policies to reduce the overall cost of financial institutions and are
therefore of relevance to the study. In addition, we will review the merits and/
or demerits of a full taxation approach i.e. taxing financial services at the
standard rate of 14 percent of VAT.
12
1.7. Limitations
The financial services sector in South Africa consists primarily of banks, short term
and long terms insurers, brokerage firms, asset managers and collective
investment schemes.
This study is however restricted to an analysis of the VAT treatment of financial
services in the banking industry only.
1.8. Methodology
The research method adopted is of a qualitative, interpretive nature, based on a
detailed interpretation and analysis of the relevant source information.
An extensive literature review and analysis will be undertaken that includes the
following sources –
• Books;
• Cases;
• Electronic databases;
• Electronic resources – internet;
• Journals;
• Magazine articles;
• Publications; and
• Statutes.
13
CHAPTER 2: VAT ON FINANCIAL SERVICES IN SOUTH AFRICA
2.1. Introduction of VAT in South Africa
In South Africa, a general sales tax (GST) operated from 1978 until 29 September
1991. It was at the opening of Parliament on 5 February 1988 that the State
President announced that GST was to be abolished and replaced by a value-
added tax system.
Under the GST system, tax was generally only charged on the sale to the final
consumer.
Under a VAT system however, the tax is charged along many stages of the
production and distribution process. Output tax is levied on goods or services
supplied by VAT registered businesses (vendors) and a credit is given for the tax
paid on the inputs (that is, input tax) used to produce the taxed output. The tax is
paid by the buyer and collected by the seller. For each business, the net VAT to
be remitted to the government would be its output tax (collected from its
customers) less its input tax (paid to its suppliers). In certain instances, where
input tax is more than output tax, a net VAT refund is due to the business. It is this
crediting mechanism that allows most businesses to bear no VAT burden.
As commented by Beneke and Silver (2015), ‘VAT is essentially a tax on the
expenditure in the domestic economy rather than a tax on the output of the
domestic economy’.
14
2.2. The VATCOM report
Subsequent to the State President’s announcement of VAT, the draft Value-Added
Tax Bill was issued for general comment on 18 June 1990. The then Minister of
Finance simultaneously appointed a committee (VATCOM) consisting of members
from both the public and private sectors to consider the comments and
representations made by interested parties on the draft VAT Bill.
VATCOM released a comprehensive report on 19 February 1991, setting out its
findings and recommendations in relation thereto. Despite VATCOM’s suggestion
that exemptions, zero-ratings and exceptions should be kept to a minimum, it
recommended that financial services should be exempted from VAT. VATCOM
concluded that as no country was yet able to overcome the difficulties foreseen
with the taxation of financial services, it did not recommend that South Africa
perform the pioneering work in this regard (Marais 1991, p. 31).
(Note: VATCOM’s analysis in considering whether financial services should be
brought into the VAT net or not will be later discussed in Chapter 5 where
alternative methods to taxing financial services are considered.)
2.3. Implementation of VAT in South Africa
Following VATCOM’s recommendations, the SA VAT Act was implemented with
effect from 30 September 1991.
Section 12(a) of the SA VAT Act provided for the exemption of financial services
from VAT. Financial services were defined in section 1 of the SA VAT Act, read in
conjunction with the list of exempt services as set out in section 2 of the SA VAT
Act. The list of exempt services included various banking services, the provision of
credit under a credit agreement, dealings involving various kind of securities, life
insurance and superannuation schemes.
15
‘Agreeing to do’ or ‘arranging’ activities were also viewed as financial services
however the advising thereon for which a separate fee was charged was not
viewed as an exempt financial service.
In addition the exemption did not apply where such financial services were taxed
at the rate of zero percent instead.
(SARS 1991)
2.4. Subsequent amendments to the SA VAT Act
In 1992, section 12(a) of the SA VAT Act was amended to exempt the supply of
any other goods or services by the supplier of the financial services, which were
‘necessary’ for the supply of such financial services (SARS 1992, p. 17).
By way of example:
A bank’s administration of a client’s cheque account was viewed as a financial
service under section 2(1)(b) of the SA VAT Act. In addition, the bank charged the
client separately for the issue of a cheque book. As the client requires a cheque
book in order to operate his cheque account, it was considered that the supply of
the cheque book was ‘necessary’ for the supply of financial services and similarly
should be exempt from VAT (SARS 1994, p.21).
‘Necessary’ as defined by Oxford Dictionary Online, means ‘needed to be done,
achieved, or present, essential’ (Oxford University Press 2016).
Interpretative issues however arose as a result of the insertion of the word
‘necessary’ into Section 12(a) of the SA VAT Act for both taxpayers and revenue
authorities.
16
Consequently in 1994, section 12(a) of the SA VAT Act was amended to include
that the ‘incidental’ supply of goods or services by the supplier of financial
services, where the supply of such goods or services was necessary for the
supply of the financial services should be exempt from VAT (SARS 1994, p. 21).
‘Incidental’ as defined by Oxford Dictionary Online, means ‘the happening as a
minor accompaniment to something else or the happening as a result of an
activity’ (Oxford University Press 2016). The insertion of the words ‘incidental’ as
opposed to ‘necessary’ was intended to provide the clarity required.
With effect from 1 April 1995, section 2 of the SA VAT Act was further amended
to delete section 2(1)(m) of the SA VAT Act which provided that the payment or
collection on someone else’s behalf of any amount in respect of a debt security,
equity security or participatory securities were exempt financial services. The debt
collection services were similar to any other administrative or professional service
and it was therefore considered unjustifiable to treat such services differently for
VAT purposes (SARS 1994, p. 10).
Similarly, section 2(1)(n) of the SA VAT Act which exempted the activity of
‘agreeing to do’ or the ‘arranging of’ financial services which were exempted under
section 2(1) of the SA VAT Act, was amended by the deletion of the words
‘arranging’. ‘Arranging’ referred to instances where brokers’ agents and other
intermediaries provided services which were viewed as being no different to any
other administrative or professional service provided (SARS 1994, p. 11).
The amendments to the above two sections was a prelude to what was to be a
significant shift in SA’s tax landscape.
17
2.5. Appointment of the Katz Commission
Included in its mandate, the Katz Commission was appointed by the South African
government to investigate the inclusion of a wider range of financial services into
the VAT system (that is, as a means to broaden the VAT base).
The Katz Commission (Katz 1995, p. 30) proposed that the following should be
brought into the VAT net, ‘all fee based financial services and all fee based
services in respect of life insurance and other superannuation funds’.
Following the Katz Commission’s recommendations, the SA VAT Act was
subsequently amended with effect from 01 October 1996.
Section 12(a) of the SA VAT Act was amended to include that only underlying
financial services as defined in section 2 of the SA VAT Act are exempt from VAT.
The supply of goods or services incidental to and necessary for the supply of
those financial services were now subject to VAT for example, the supply of a
cheque book to a customer was now subject to VAT.
The below amendments were further necessary to give effect to the
recommendations of the Katz Commission (Davis 2014, p. 42), (SARS 1996, p. 8-
11):
The deletion of section 2(1)(e) of the SA VAT Act, which previously exempted
the underwriting or sub-underwriting of the issue of an equity security, debt
security or participatory security;
The deletion of section 2(1)(g) of the SA VAT Act which provided that the
renewal or variation of a debt security, equity security or participatory security
or credit agreement constituted a financial service;
18
The deletion of section 2(1)(h) of the SA VAT Act which related to the
provision, taking, variation or release of a financial guarantee, indemnity,
security or bond in respect of the performance of obligations under a cheque,
credit agreement, debt security, equity security or participatory security as a
financial service. The effect of the deletion was that the transactions in relation
to the services listed in section 2(1)(h) of the SA VAT Act should be treated in
the same manner as taxable short-term insurance;
The scope of section 2(1)(i) of the SA VAT Act, which provided for the supply
of a long-term insurance policy to be an exempt financial service, was reduced
to exclude from the definition of a ‘financial service’, the management of a
superannuation scheme by long-term insurers;
The scope of section 2(1)(j) of the SA VAT Act, which included the provision or
transfer of ownership of an interest in a superannuation scheme or the
management of a superannuation scheme as a financial service, was limited
by the exclusion of the activity of the management of a superannuation
scheme. The service of managing a superannuation scheme by an
intermediary therefore became a taxable service in line with the
recommendations of the Katz Commission;
Section 2(1)(n) of the SA VAT Act, which provided for the activity of ‘agreeing
to’ do any of the activities specified in section 2(1) of the SA VAT Act, was
deleted; and
A proviso was added to section 2(1) of the SA VAT Act to stipulate that the
activities contemplated in section 2(1)(a) to 2(1)(f) of the SA VAT Act shall not
be considered to be a financial service to the extent that the consideration
payable in respect thereof is any fee, commission or similar charge, but
excluding a discounting cost.
19
With effect from 1 March 1999, the scope of financial services was further limited
by the inclusion of a merchant’s discount in the proviso to section 2(1) of the SA
VAT Act (that is, the merchant’s discount became subject to VAT from that date)
(SARS 1998, p. 35-36).
2.6. Current SA VAT legislation
In terms of the prevailing SA VAT Act, the following provisions exist:
Section 12 (a) provides that the supply of any financial services, but excluding
the supply of financial services which, but for this paragraph, would be charged
with tax at the rate of zero percent under section 11 of the SA VAT Act, are
exempt from VAT.
Section 1 of the SA VAT Act defines financial services as ‘activities which are
deemed by section 2 of the SA VAT Act to be financial services’.
Section 2(1) of the SA VAT Act provides that the following activities shall be
deemed to be financial services: ‘
a) The exchange of currency (whether effected by the exchange of bank
notes or coin, by crediting or debiting accounts, or otherwise);
b) the issue, payment, collection or transfer of ownership of a cheque or
letter of credit;
c) the issue, allotment, drawing, acceptance, endorsement or transfer of
ownership of a debt security;
d) the issue, allotment or transfer of ownership of an equity security or a
participatory security;
e) . . . . . .
f) the provision by any person of credit under an agreement by which
money or money’s worth is provided by that person to another person
20
who agrees to pay in the future a sum or sums exceeding in the
aggregate the amount of such money or money’s worth;
g) . . . . . .
h) . . . . . .
i) the provision, or transfer of ownership, of a long-term insurance policy or
the provision of reinsurance in respect of any such policy: Provided that
such an activity shall not be deemed to be a financial service to the
extent that it includes the management of a superannuation scheme;
j) the provision, or transfer of ownership, of an interest in a
superannuation scheme;
k) the buying or selling of any derivative or the granting of an option:
Provided that where a supply of the underlying goods or services takes
place, that supply shall be deemed to be a separate supply of goods or
services at the open market value thereof: Provided further that the
open market value of those goods or services shall not be deemed to be
consideration for a financial service as contemplated in this paragraph:
l) . . . . . .
m) . . . . . .
n) . . . . . .
Provided that the activities contemplated in paragraphs (a), (b), (c), (d) and ( f )
shall not be deemed to be financial services to the extent that the consideration
payable in respect thereof is any fee, commission, merchant’s discount or
similar charge, excluding any discounting cost.’
Section 2(2) and 2(3) of the SA VAT Act provide further meaning to certain
terms included in section 2(1) of the SA VAT Act; and
Section 2(4) of the SA VAT Act sets out exclusions from the definition of
financial services.
21
CHAPTER 3: CRITICAL ANALYSIS OF THE SA VAT EXEMPTION METHOD
3.1. The underlying nature of financial services
As stated by Merrill (1997, p. 16):
Most of consumption tax literature regarding the taxation of financial-intermediation services implicitly accepts the proposition that financial services should be subject to tax in the same manner as other goods and services. This proposition was further clearly articulated in Alan Tait's treatise on value-added taxes: ‘Value-added in banking and insurance is no appropriate for inclusion in the VAT base than any other service or provision of goods. Indeed, to exempt financial services from VAT excludes from taxation a sector that is often perceived as extraordinarily remunerative, has a high visibility in terms of its physical assets, and is seen as a bastion of traditional orthodoxy’.
A few writers, however, have questioned the above conventional view.
Grubert and Mackie for instance viewed that almost all financial-intermediation
fees (whether explicit or implicit) inherently were charges for investment rather
than consumption activities, and they took the position that such fees were not the
proper object of a consumption tax. In their view, investment services affected the
price of buying an investment good, not the price of buying a consumption good.
The borrowing of funds was merely a means for shifting consumption forward in
time. As the services related to non-consumption goods, such financial services
should not be in the base of a consumption tax. Further if a consumption tax were
imposed on financial intermediation services, the result would be to reduce the
rate of return to savers (Grubert & Mackie 2000, p. 24), (Merrill 1997, p. 16-17).
It appears that the above view seemed to approach the problem from the point of
view of an investor or depositor (that is from the perspective of the person who
deposits funds with the bank for safe-keeping) rather than from the perspective of
the borrower who consumes the service and bears the tax (for example the
borrower who requires a loan to purchase goods or services for immediate
22
consumption). (Note: For purposes of this study, the words ‘investor’ or ‘depositor’
are interchangeable).
It also placed a higher reliance on the bank being in a position to know what the
intended use will be with the funds provided, which is not always the case. For
example, if the bank were to provide car financing, then yes it would be
considered fair to say that the bank is aware of the intended use (that is, the
customer is to purchase a car for immediate consumption). However, if a bank
was providing a personal loan, the specifics of the customers’ use thereof, may
not always be known (that is, whether the customer is taking out a loan to
purchase a consumption good or not?).
With the Grubert and Mackie argument, the VAT treatment of the supply is very
much based on the customers’ use of the services which appears to go against
the basic principles of the VAT Act. In terms of section 7(1)(a) of the SA VAT Act,
it is the supplier’s responsibility to levy VAT based on the nature of the supply of
the good or service, not based on the recipient’s intended use of such good or
service.
As previously stated in Chapter 2, VATCOM agreed that there did not appear to
be any reason as to why financial services should not be subject to VAT. Financial
services were consumption expenditure just like any other services and as they
formed a higher proportion of budgets and higher income households, there was
every reason to subject them to VAT (Marais 1991, p. 29).
These sentiments were equally shared by the Davis Tax Committee in June 2015.
The Davis Tax Committee did not disagree that the supply of financial services
should be subject to tax when supplied to a final consumer, however determining
the consideration for that supply had proved elusive (Davis 2014, p. 16).
23
(Note: The above-mentioned valuation difficulties are further discussed in Chapter
5, where the option to tax financial services at the standard rate is considered).
3.2. Basic principles of a VAT system
To evaluate the weaknesses of any tax system it is important to measure such
system against the very foundation (that is, the underlying principles) upon which it
was built.
While South Africa is not currently a member of the Organization for Economic Co-
operation and Development (OECD), South Africa has a ‘working relationship’ with
the OECD, participates in a variety of OECD events and has entered into an
‘enhanced engagement’ programme with the OECD.
As such, South Africa follows OECD guidelines and it is of relevance to the study.
Following a review of both the VATCOM report and International VAT GST
guidelines which were released in November 2015, the main principles of a VAT
system are outlined below (Marais 1991, p. 5-7), (OECD 2015, p. 15-16):
3.2.1. VAT is a consumption type tax
VAT is a tax on final consumption by households. As a matter of
elementary logic as businesses are not households they are incapable of
final or household consumption. The burden of the VAT should therefore
not rest on businesses.
This central design feature of the VAT system, therefore requires a
mechanism for relieving businesses of the burden of the VAT they pay
when they acquire goods, services, or intangibles. Under the invoice-
credit method each supplier charges VAT at the rate specified for each
24
supply and passes to the purchaser an invoice showing the amount of tax
charged. The purchaser is in turn able to credit that input tax against the
output tax charged on its sales, remitting the balance to the tax authorities
and receiving refunds when there are excess credits.
3.2.2. Neutrality
In domestic trade, tax neutrality is achieved in principle by the multi-stage
payment system: each business pays VAT to its providers on its inputs
and receives VAT from its customers on its outputs. To ensure that the
‘right’ amount of tax is remitted to tax authorities, input VAT incurred by
each business is offset against its output VAT, resulting in a liability to pay
the net amount or balance of those two. This means that VAT normally
‘flows through the business’ to tax the final consumers. It is therefore
important that at each stage, the supplier is entitled to a full right of
deduction of input tax, so that the tax burden eventually rests on the final
consumer rather than on the intermediaries in the supply chain. This
design feature gives to VAT its essential character in domestic trade as an
economically neutral tax.
The OECD further provides the following guidelines on the basic principles
of neutrality:
Guideline 2.1
The burden of value added taxes themselves should not lie on taxable
businesses except where explicitly provided for in legislation.
25
Guideline 2.2
Businesses in similar situations carrying out similar transactions should
be subject to similar levels of taxation. The tax should be neutral and
equitable in similar circumstances. This is to ensure that the tax
ultimately collected along a particular supply chain is proportional to
the amount paid by the final consumer, whatever the nature of the
supply, the structure of the distribution chain, the number of
transactions or economic operators involved and the technical means
used.
Guideline 2.3
VAT rules should be framed in such a way that they are not the
primary influence on business decisions. It is recognised that there are,
in fact, a number of factors that can influence business decisions,
including financial, commercial, social, environmental and legal factors.
Whilst VAT is also a factor that is likely to be considered, it should not
be the primary driver for business decisions. For example, VAT rules
or policies should not induce businesses to adopt specific legal forms
under which they operate (for instance, whether it operates in a
subsidiary or a branch structure).
In addition, to support the neutrality principle, the VAT rules should be
accessible, clear and consistent.
3.2.3. Equity
According to Adam Smith (1776, p. 451):
The subjects of every state ought to contribute towards the support of the government as nearly as possible in proportion to its respective abilities that
26
is in proportion to the revenue which they respectively enjoy under the protection of the state.
It follows that equity refers to the tax’s ability to treat all concerned parties
equally.
3.2.4. Efficiency, productivity and simplicity
An efficient and productive tax should be able to collect large amounts of
revenue without distorting consumer or producer choice, investments or
savings.
3.3. Weaknesses identified with the exemption method:
3.3.1. Contravention of the consumption rule
Due to the VAT exemption applied, financial services are denied input tax
relief on costs incurred to generate exempt supplies. A VAT cost is borne
by the financial service provider which contravenes the fundamental
consumption rule that the final tax burden should be borne by the
household not the suppliers in the chain.
3.3.2. Contravention of the neutrality and equity principle
Having regard to the consumption rule above, OECD Guideline 2.1
provides that the burden of value-added taxes themselves should not lie
on taxable businesses except where explicitly provided for in legislation.
Although financial services are specifically exempt from VAT in the
legislation, it does not alleviate the fact that the underlying consumption
principle has been breached. Further, despite the exemption being
27
stipulated in the legislation, it does not necessarily mean that the
exemption is correct.
OECD Guideline 2.2 provides that businesses in similar situations carrying
out similar transactions should be subject to similar levels of taxation.
Without having to compare two businesses, if an analysis is performed by
looking at a single financial service provider who provides services to a
customer outside of South Africa and similarly provides services to a local
customer, clear differences in the VAT treatment are identified.
In the former, the services are zero-rated in terms of the SA VAT Act. As a
taxable supply is made, the vendor is entitled to deduct input tax
deductions on expenses incurred to generate the taxable supply.
In the latter, the supply of financial services takes place locally, therefore
the supply of financial services is exempt from VAT and the supplier is
denied input tax relief on expenses incurred to generate such supplies.
Arguably, the same service has been provided irrespective of who the
recipient of the service is, however in the former case, the financial service
provider bears a VAT cost and in the latter, it doesn’t. This appears to
undo the principle of neutrality and equity. Further, as financial services
are not taxed in the same way or to the same extent of other services, this
appears inequitable.
As commented by de la Feria & Walpole (2009, p. 911):
Some authors have drawn attention to the phenomenon of ‘creeping exemptions’. They contest that, as more exemptions are granted, other sectors of the economy will be tempted to claim exemptions for themselves thus further eroding the tax base.
28
According to Ebrill, Keen & Summers (2001), VAT exemptions were
considered to be an ‘aberration in terms of the basic logic of VAT’.
Exemptions appear to go against the core principle of VAT as a tax on all
consumption, and also undermines the efficiency and neutrality of the tax.
The contraventions of the fundamental principles are further elaborated by the
weaknesses in the exemption system, identified below:
3.3.3. Tax Cascading
Tax cascading is one of the main side effects of treating activities as
exempt.
Where a financial institution who provides exempt financial services is
denied input tax relief in respect of VAT borne by it on the acquisition of
goods and services from third parties, the financial institution may choose
to recover the cost by including it in the price of its services.
In a situation where the services are provided to another VAT registered
business who on sells to the final consumer, the sales price to a final
consumer will typically be calculated as cost plus a mark-up added by the
VAT registered business. The VAT registered business’s cost will include
the portion of VAT cost charged by the initial financial services provider to
the VAT registered business. Consequently, the VAT registered
business’s sales price to the final consumer includes a portion of VAT
which is then subjected to further VAT at 14 percent. Essentially a tax on a
tax occurs which fundamentally contravenes the principles of VAT being a
neutral tax.
29
3.3.4. Vertical integration
A bank or other supplier of exempt financial services is denied input tax
credits on acquisitions (domestic purchases and imports) used in
rendering those exempt services. If a bank provides needed services in-
house rather than purchasing them from outside suppliers, the bank can
avoid some of that non-creditable input tax.
For example, assume that a bank maintains its own internet technology
department Instead of outsourcing this function. Such service is used
exclusively in connection with the bank’s exempt financial services.
If this service were outsourced, assume that the bank would pay R 100
000 plus R 14 000 VAT. As long as the bank can provide the same service
for less than the R 114 000, the bank has an incentive to provide this
service in-house.
Examples of outsourced transactions which result in a non-recoverable
VAT cost to a financial services provider includes:
The supply of support services such as human resources, information
technology, treasury, finance and legal services etc.;
Centralised customer call and service centres;
Management and administration services; and
Provision of infrastructure such as buildings and equipment.
As set out in the Davis Tax Committee report, vertical integration creates
the following problems (Davis 2014, p. 45):
Discrimination against third party suppliers. These suppliers will no
longer be used as they are considered to be expensive;
30
Discrimination against smaller financial institutions that are not in a
position to vertically integrate. This results in smaller financial
institutions potentially being outpriced in the market (that is, due to the
added VAT cost, it will have a higher sales price than the larger
financial institutions); and
It frustrates the natural development of specialisation and creates
inefficiencies in the production and delivery of financial services. To
avoid the VAT cost, financial institutions may seek to perform activities
in house. Should a financial institution not have the necessary skill
level or expertise, this may lead to unnecessary errors.
In addition, the non-deductible VAT cost also impacts on the manner in
which a financial services group is structured. For example, a bank may
invest directly in fixed property in order to avoid any irrecoverable VAT
cost on inter-company rentals. Further, banks who own their property
investments directly also enjoy a higher VAT apportionment ratio
compared to banks that invest via property companies. The decision to
restructure is directly as a result of the VAT burden imposed on financial
service providers. This highlights a further contravention of the OECD
Guideline 2.3 which states that the VAT rules should be framed in such a
way that they are not the primary influence on business decisions.
3.3.5. VAT apportionment
Where costs are incurred to make both taxable and exempt supplies (that
is, mixed costs), in the event that the de minimis rule does not apply, input
tax recovery is restricted to an apportioned rate. (Note: the de minimus
rule allows a full input tax deduction where taxable use is equal to or
greater than 95 percent of the total use or consumption).
31
As South African banks generate significant values of exempt supplies,
the de minimus rule is generally not met. Consequently, South African
banks are required to restrict is input tax deductions to an apportioned
rate. South African banks therefore incur an irrecoverable VAT cost which
contravenes the consumption rule.
Currently, the only approved method of VAT apportionment as set out in
South African VAT legislation is the standard turnover-based method of
apportionment which calculates an apportionment rate by dividing the
value of taxable supplies for that period over (taxable supplies + exempt
supplies + the sum of any other amounts of income not included in taxable
or exempt, which were received or which accrued during the period,
whether in respect of a supply or not).
If the standard-turnover based method yields an unfair result, alternative
methods of apportionment can be agreed with the SARS.
In this regard, an alternative method of apportionment has been agreed
between BASA and SARS. The method applied is however by no means
simple. The lack of simplicity contravenes an underlying principle of a VAT
system. In addition, it poses administrative and interpretative difficulties for
banks which are further discussed in Chapter 4.
3.3.6. Aggressive VAT planning
According to de la Feria and Walpole (2009, p. 909), a bank is presented
with two basic methods of curtailing VAT costs:
1) Minimize VAT input, by acquiring less goods and/or services which are subject to VAT; or
32
2) Maximizing VAT output, by increasing the number of taxable supplies and therefore, the overall percentage of deductible input VAT…
Whilst the legitimacy of engaging in VAT planning is acknowledged often non-tax reasons will prevent legal persons from adopting measures which will reflect either of these methods. It is in this context that so-called aggressive VAT planning, or VAT avoidance, schemes will often emerge.
An example of how financial institutions’ VAT costs, resulting from the
exclusion of the right to deduct input tax, can act as a catalyst for
engagement in aggressive VAT planning was illustrated in the Halifax
case.
As stated in (Taxation 2012), the facts of the case were as follows:
A bank (H) wished to construct a number of ‘call centres’. If it had
arranged for this itself, most of the input tax would have been attributed to
its exempt supplies and would have been irrecoverable.
It therefore granted a leasehold interest in the relevant sites to an
associated company (L), which was not a member of its VAT group.
L then arranged for another associated company (C) to carry out the work.
C engaged builders to undertake the construction.
C reclaimed input tax on the amounts charged by the builders and
charged output tax to L, which reclaimed these amounts as input tax.
The European Court of Justice (ECJ) held that the abuse of rights doctrine
applies to VAT where a transaction results in the accrual of a tax
advantage. The result for Halifax was that input tax was blocked for the
entities which sought to deduct such tax ‘abusively’.
3.3.7. Adapting to new developments in the banking industry
Cognizant of the fact that things may change over time, de la Feria and
Walpole (2009, p. 900-908) acknowledged that there were significant new
developments in financial products, as well as the emergence of new
supply structures, which make use of, inter alia, outsourcing,
33
subcontracting and pooling techniques as well as the rise of the internet
as a medium for Business to Business (B2B) and Business to Consumers
(B2C) transactions.
In the European Union (EU), traders and national tax administrations were
becoming increasingly unsure as to whether these new products, and the
new supply structures fall within the scope of the exemptions. As a result,
there was a growing level of case law emerging from the ECJ on the
scope of the exemptions which were applicable to financial supplies.
This climate of uncertainty will in turn have the effect of increasing
compliance and administrative costs, as more time and resources will be
devoted to establishing the correct VAT treatment of each financial supply.
34
CHAPTER 4: CURRENT MECHANISMS IN PLACE TO REDUCE VAT
COSTS IN SOUTH AFRICA
As set out in Chapter 3, there are many weaknesses which have arisen from the VAT
exemption of financial services in South Africa.
In an effort to reduce some of the VAT costs imposed on banks, the following measures
were introduced by SARS in South Africa.
4.1. Taxation of explicit finance charges
As discussed in Chapter 2.5, following the recommendation of the Katz
Commission, fee based financial services were brought into the VAT net because
it was considered unjustifiable to treat these services differently from other
administration or professional services.
The rationale behind the decision was that financial service providers who
supplied financial services for a fee would now be entitled to claim a larger
percentage of its VAT incurred on taxable expenses as input tax.
As commented by the Davis Tax Committee, the reality however was that the
expenses incurred to provide the above services mainly comprised of staff costs
for which no input tax deduction was available. It was found that the taxable
expenses in relation to the provision of such services, which qualified for input tax
deductions were generally not significant (Davis 2014, p. 45).
Further, even if all financial services with explicit fees were taxed, a significant
share of the value–added of the banking industry (that is, the value of its
intermediation services which are included in its interest margins between lending
35
and deposit–taking activities), would still be exempt resulting in irrecoverable VAT
cost.
In addition, Merrill (1997, p. 21) commented that ‘Any attempt to tax explicit fees
while still exempting implicit fees, may create an incentive for financial service
institutions to alter fee structures to minimize tax’.
4.2. Agreement of an alternative method of apportionment to claim input tax
deductions on mixed expenses.
4.2.1. General Principles- standard turnover-based method of VAT
apportionment
As set out in the Introductory Chapter, in terms of the SA VAT Act, the
basic principles for claiming input tax are as follows:
1) Where expenses are incurred wholly to generate taxable supplies, an
input tax deduction is permitted;
2) Where expenses are incurred wholly to make taxable supplies, an
input tax deduction is denied; and
3) Where expenses are incurred to make both taxable and exempt
supplies (that is, mixed costs), an input tax deductions is restricted to a
calculated apportionment rate, where the de minimis rule does not
apply.
Steps 1 and 2 refers to the principles of direct attribution. Direct attribution
calls for the attribution of the VAT expense according to the intended
purpose for which the acquired goods or services will be used. It is only
when an expense has been incurred partly for the purpose of
consumption, use or supply in the course of making taxable supplies and
36
partly for exempt and other non-taxable purposes, that the VAT must be
apportioned.
The most common expenses that need to be apportioned are the general
overheads of the business.
Currently, the only pre-approved method which may be used to apportion
VAT incurred on mixed purposes without specific prior written approval
from SARS, is the standard turnover-based method.
The standard turnover-based method of VAT apportionment as set out in
the SARS VAT 404 Guide for Vendors is as follows (SARS 2015a, p. 49):
Formula: y = a × 100
(a + b + c) 1
Where:
y = the apportionment ratio/percentage;
a = the value of all taxable supplies (including deemed taxable supplies) made during the
period;
b = the value of all exempt supplies made during the period; and
c = the sum of any other amounts of income not included in “a” or “b” in the formula, which
were received or which accrued during the period (whether in respect of a supply or not).
Notes:
1. The term “value” excludes any VAT component.
2. “c” in the formula will typically include items such as dividends and statutory fines (if
any).
37
3. Exclude from the calculation the value of any capital goods or services supplied,
unless supplied under a rental agreement/operating lease (that is, not a financial lease
or instalment credit agreement).
4. Exclude from the calculation the value of any goods or services supplied where input
tax on those goods or services was specifically denied.
5. The apportionment percentage should be rounded off to two decimal places.
6. Where the formula yields an apportionment ratio/percentage of 95 percent or more, the
full amount of VAT incurred on mixed expenses may be deducted (referred to as the
de minimis rule).
Conditions:
The aforementioned method is subject to the following conditions:
1. The vendor * may only use this method if it is fair and reasonable. Where the method is
not fair and reasonable or inappropriate, the vendor must apply to SARS to use an
alternative method.
2. Vendors using their previous year’s turnover to determine the current year’s
apportionment ratio are required to do an adjustment (that is, the difference in the ratio
when applying the current and previous years’ turnover) within six months after the end
of the financial year.
*Vendor as defined in section 1 of the SA VAT Act means ‘any person who is or is
required to be registered under this Act’.
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Where, however, the standard turnover-based method yields an unfair,
unreasonable or distortive result, a vendor may approach SARS to obtain
an alternative method of VAT apportionment.
4.2.2. Alternative BASA method of VAT apportionment agreed with SARS
Due to the unfairness of applying the standard turnover-based method in
the banking industry, BASA approached SARS to obtain an alternative
method of apportionment.
An alternative method of apportionment was agreed between the two
parties dated 13 May 1998 (SARS 1998). This method was subsequently
withdrawn and replaced with a new VAT apportionment ruling issued by
SARS to BASA on 2 June 2015 which is effective from the date of issue
and is applicable to all applicants in respect of financial years commencing
on or after 1 July 2015 for a period of five years (SARS 2015b).
The alternative method of apportionment is set out below:
Formula: y = a × 100
(a + b) 1
Where:
y= apportionment ratio relating to taxable supplies
a= the value of all taxable supplies made during the period
b= the sum of exempt supplies made during the period and all other amounts of income
which accrued during the period (whether in respect of a supply or not)
(Note: The classification of income into the different categories is difficult. Fortunately, the
Commissioner, in conjunction with the Council of South African Bankers (COSAB),
39
developed a schedule listing most of the services rendered by large South African banks
and stipulates whether each service is taxable, exempt, or zero-rated). (SARS 2007)
Determination of A
The value of total taxable supplies subject to VAT in terms of section 7(1)(a) of the SA
VAT Act excluding VAT for the financial year, adjusted by the following:
Exclusions
1. The cash value of goods supplied under an instalment credit agreement (ICA) or a
floor plan agreement which complies with the definition of ICA as per the SA VAT Act.
The exclusion is based on the principle that banks do not enter into these types of
arrangements to make a profit on the underlying item but rather to provide finance, on
which interest and fees are earned. As a result the cash value of goods supplied
under an ICA must be excluded from the apportionment method. The only income
resulting from an ICA to be reflected in the apportionment method would be interest
income included under B and fee income included under A.
2. The portion of rental payment relating to the capital value of goods supplied under a
rental agreement which is entered into as a mechanism of finance. In addition rental
payments must be reduced by the cost of funding (that is, interest paid) pertaining to
those agreements.
Any arrangement which falls within the ambit of a rental agreement as defined in the
SA VAT Act which is entered into as a mechanism of financing must for the purposes
of this method abide by similar rules to that of an ICA. As a result the value of the
underlying asset must be excluded from the apportionment value and the cost of
funding in relation to rental agreements must be deducted from the value of the rental
payment to be included in the formula.
40
3. Consideration received in respect of the disposal of capital assets whether fixed or
movable.
The disposal of capital goods is not a normal business activity of a bank. As a result,
the inclusion of the value of the disposal of capital assets in the apportionment method
will result in a distorted apportionment ratio which does not accurately reflect the
business activities of a bank that is the purpose for which a mixed expense was
incurred.
4. Consideration received from the disposal of business activities.
A bank does not dispose of business activities as a normal part of its business. Being
an abnormal event which will result in extraordinary income for apportionment
purposes the disposal of business activities is excluded from the apportionment
method.
5. Change in use adjustments as envisaged in sections 18 and 18A of the SA VAT Act.
A change in use adjustment adjusts the input tax deducted to reflect the actual use as
opposed to the intended use of the goods or services and are to be excluded from the
apportionment formula.
6. Deemed supplies in respect of indemnity payments received as envisaged in terms of
section 8(8) of the SA VAT Act to the extent that the indemnity payments relate to
extraordinary income.
Indemnity payments that do not comply with section 8(8) of the SA VAT Act usually
comprise abnormal events or the loss of a capital asset applied towards the making of
taxable supplies.
41
7. Extraordinary income
This is non-recurring income received due to exceptional circumstances that are
unlikely to be repeated. The inclusion of extraordinary income will result in the
apportionment ratio being distortive as it will not fairly reflect the extent to which the
expenses were incurred for the purposes of making taxable supplies.
Adjusted values:
8. Include a 3 year moving average of the net trading margin from taxable (including zero
rated) financial asset trading activities.
9. Reduced zero rated interest income with the cost of funding allocated to such income.
Specific inclusions:
10. Gross proceeds resulting from the disposal of properties in possession and
repossessions.
Determination of B
The value of exempt supplies made as well as any other income generated during the
financial year, whether in respect of a supply or not, adjusted with the following:
Exclusions:
11. Extraordinary non-taxable income
42
12. The capital value of loans
Based on the fact that the income derived by a bank as a result of the provisions of
loans is that of interest and fees, the capital value of the loan should not be included in
the formula.
13. Fair value gains and losses reflected as income for Financial Reporting Standards
(IFRS) purposes
Any fair value gains and losses reported in income as a result of revaluations on
assets as required by IFRS is not regarded as income for VAT purposes. As a result
such income may be excluded from the method. This exclusion does not apply to the
trading of financial assets.
14. Foreign exchange gains and losses not subject to any hedging activities
This includes both realized and non-realized gains however the exclusion does not
apply to the trading of financial assets or where the exchange gains or losses result
from the normal trading activities of a bank (that is the exchange of currency on behalf
of a customer).
Adjusted values
15. Dividend income
All dividend income is included except for Section 8E and 8EA instruments of the
South African Income Tax Act 58 of 1962 (SA Income Tax Act) which are deemed to
be interest received. Section 8F and 8FA instruments of the SA Income Tax Act, the
interest received thereon will be deemed to be dividends in species for purposes of
the apportionment method. Where a member of the class finds that the inclusion of
43
dividends unfairly distorts the ratio, the member may apply to SARS for an alternative
arrangement relating to the inclusion or exclusion of such dividend income.
16. Include a 3 year moving average of the net trading margin from financial asset trading
activities
‘Financial asset’ refers to any commodity and other financial asset which can be
traded on an exchange or over the counter and includes but is not limited to
repurchase agreements, debt securities, equity securities and derivatives.
‘Net trading margin’ refers to the net profit or loss recorded in the financial records as
either realized or unrealized from a banks trading activities and does not include any
other expenses which may be allocated to the trading activities. The objective of the
banks in this regard is not the acquisition of financial assets to be held over long term
but rather the trading thereof at the highest profit possible. The trading of financial
assets can either be done as principal or as agent on behalf of customers. In both
instances, the objective and activities remain the same. The inclusion is only
appropriate to the extent that a bank’s net trading margin is positive for all years in the
consecutive 3 year period used to calculate the average net trading margin to be
included in the formula. Should class members net trading margin result in a loss for
any one of the 3 years, the specific member is required to approach SARS for an
alternative method of recognizing the net trading margin in the apportionment method.
17. Reduce interest income with the cost of funds allocated to such income.
A bank takes on the role of intermediary between lenders and borrowers. Its main
objective in this regard is the borrowing and lending of money (which constitutes a
single activity) for a profit. This profit is represented by the net interest margin derived
from the aforementioned activities. With the view of recognizing a banks role as
intermediary in the lending process, the margin from lending (that is interest received
less interest paid) should be included in the apportionment method as opposed to
gross interest received. This principle will only apply in respect of interest paid on
44
funds borrowed to on-lend and is extended to any zero rated interest received by a
bank. Based on the above, interest income must be reduced with the cost of funding
allocated to such income.
18. Bad debts/ impairments
The actual amount of bad debts written off during a year may be used to reduce
income already included in the apportionment formula as follows:
The interest portion of bad debts written off must be applied towards reducing the net
interest income (exempt and zero rated interest respectively) included in the formula;
and the portion of bad debts written off relating to fee income must be applied towards
reducing the fee income included in A.
No portion of the capital amount written off as bad debts may be applied towards
reducing income in the apportionment method. This is on the basis that the capital
value of the loan is excluded from A and B in the method.
4.2.3. Analysis of the BASA VAT apportionment method
A positive addition to the new VAT apportionment ruling was the
reduction of bad debts from both interest and fee income. An argument
may however exist that when a bank prices the interest rate margin,
the full bad debt cost is priced into the calculation of the interest rate
margin (that is, it would include the capital portion as well).
Consequently it is a reasonable consideration that the full impairment
should be allowed as a deduction against interest income.
The exclusion of the capital value of rentals from the VAT
apportionment method was a new change in comparison to the
previous SARS/ BASA ruling. SARS appears to draw a link between
45
ICAs and rentals (that is, both mechanisms are methods of financing)
and therefore the treatment should align. This treatment however has
the effect of reducing the overall VAT apportionment rate and
consequently increases the VAT burden for banks.
Arguably, the most contentious issue with this method is the inclusion
of all dividends into the denominator of the ratio which has the effect of
reducing the ratio and therefore the bank’s VAT claim on mixed
expenses. It may be argued that no effort is expended to earn
dividends. The income received is purely passive in nature and as
such, no costs are incurred to earn the dividend income.
Dependent on a bank’s group structure and flow through of dividends
the inclusion of dividends into the denominator of the calculation could
have a severe impact on the bank’s VAT apportionment rate. This
concept is best illustrated by way of example.
Example 1: Impact of dividend inclusion on apportionment ratio
Bank A and Bank B have taxable income of R 100 and net interest
income of R 200. Both banks incur similar costs to generate the above
mentioned income streams. Bank A receives dividends of R 50 from its
subsidiary and pays dividends to its holding company. Bank B receives
no dividends but also pays a dividend to its holding company.
Using the agreed method of apportionment, Bank A’s recovery rate= R
100/ R (100+200+50) = 28.57%.
Bank B on the other hand has an apportionment ratio of R 100/ R
(100+200) = 33.33%.
46
This example illustrates how companies by having different group
structures could have very different apportionment ratios. Bank B is
entitled to a larger input tax credit purely because of its group structure
(that is, it does not receive dividends from any subsidiaries).
Due to the above result, it may in reality affect the way in which groups
are structured going forward. This appears to contravene the OECD
Guideline 2.3 as set out in Chapter 3. VAT rules should be framed in
such a way that they are not the primary influence on business
decisions. For example, VAT rules or policies should not induce
businesses to adopt specific legal forms under which they operate (for
instance, whether it operates in a subsidiary or a branch structure).
In addition, OECD Guideline 2.2 provides that businesses in similar
situations carrying out similar transactions should be subject to similar
levels of taxation. The tax should be neutral and equitable in similar
circumstances. Despite Bank A and Bank B carrying out similar
activities, generating similar income and having similar costs, both
entities are not subject to similar levels of taxation, Bank A has a
higher VAT burden than Bank B.
The above said, SARS has given the vendor the opportunity to
negotiate an alternative ruling in the event that the inclusion of
dividends has a distortive effect on the ratio.
In addition, the application of the above method is far from simple and
this in itself may lead to additional compliance costs for the bank.
It may also be argued that a turnover-based method for banks is
probably not the most optimal solution when VAT apportionment is
47
calculated. Apportionment should be about effort expended and the
vatable costs in relation thereto.
The costs incurred and effort expended to issue a R1 000 loan and a
R100 000 loan may in fact be the same. Logic would therefore imply
that the input tax claims should be similar in both cases. This logic is
tested by way of example below.
Example 2: Reasonability of applying a turnover-based method in
the banking industry
Bank A incurs costs of R 50 to initiate and maintain Loan 1 and Loan 2.
Loan 1: Bank A issued a R 1000 loan and earns fee income of R 100
and interest of 10% per annum= R 100. The apportionment rate
calculated based on Loan 1= R 100/ R (100+100) = 50%
Loan 2: Bank A issued a R 100 000 loan, and as the same costs are
incurred to issue Loan 2 as with Loan 1, Bank A earns a standard fee
income of R 100 and interest of 10%= R 10 000. The apportionment
rate = R 100/ R (100+10000) = 0.99%
Assuming in Loan 2, the fee income was calculated using a sliding
scale (R100 for every R 1 000), fee income of R 10 000 and interest of
10% per annum= R 10 000 was earned. The apportionment rate is
now R 10 000/ R (10000+10000) = 50%.
The results of this example shows that in order for Bank A to claim a
similar amount of tax on the same amount of expenses incurred to
generate Loan 1 and then Loan 2, the fee income in Loan 2 had to
increase. If the standard fee income is charged, reasonably expected
48
as the same costs have been incurred to generate that income, the
apportionment ratio for Loan 2 is however worsened.
Based on the above, it appears that a turnover-based approach may
have a distortionary effect when applied.
In this regard, the alternative method of VAT apportionment used in the
UK is now considered below that is, the sectorisation approach (HMRC
PE3200).
Instead of one overall apportionment ratio for a bank, the sectorised
method allows for the allocation of input tax to sectors where costs are
similarly used to make supplies. The non-attributable input tax may be
allocated between different sectors using similar ratios for example
using:
Transactional count for trades;
Head count for recharges / recoveries;
Square meterage/ floor space for property rentals etc.
A sectorised method is appropriate where there are different business
activities that use costs in different ways. Such methods are inevitably
more complex but ultimately should be more accurate and thus can be
more likely to give a result that is fair and reasonable. Sectors may
also be appropriate when there is a management accounting system
that allocates costs to different business profit/cost centres.
(Note: The scope of this study does not include the investigation of
alternative methods of VAT apportionment for the banking industry
however it is recommended that a further study is performed in this
regard.)
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CHAPTER 5: VAT ON FINANCIAL SERVICES IN OTHER TAX JURISDICTIONS
In the previous chapters we delved into the weaknesses of the current VAT exemption and
the mechanisms that were put in place by SARS to seemingly ‘reduce’ the VAT cost
burden of banks in South Africa.
In Chapter 3, it became apparent however that the exemption method was used not
because it is thought to be the theoretically correct method of taxation, but because it
proved difficult to measure the implicit financial-intermediation fees (that is, the necessity
outweighed the principle).
In this Chapter, an analysis is performed on the alternative methods that exist to taxing
financial services from a VAT perspective. The advantages and/ or disadvantages of each
method will also be discussed.
5.1. Taxing financial services at the standard rate
The standard rate of VAT in South Africa is 14 percent.
Consideration for the supply of a financial service can either be in the form of an
explicit fee or commission or a financial margin.
As commented by Kerrigan (2010, p. 2):
Where specific prices in the form of fees or commissions are identifiable, there will be little difficulty in imposing VAT on financial services. The problem however is that most of the commercial activities of financial institutions are intermediation services which generate revenue in the form of a margin.
It is the basic activities of a financial institution to borrow money from depositors
and to lend out a higher rates to borrowers. The interest it pays to depositors is
essentially consideration for the rental of the use of money and similarly the bank’s
borrowers pay a rental to the bank for the use of its money. The consideration for
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the service in these cases is normally the margin that remains with the bank, after
all cash inflows and outflows have been taken into consideration.
Example 3: Interest margin
Bank A pays interest to its depositor of 5% and charges interest of 15% to its
borrowers. Consequently, the margin representing the value-added by the bank is
10% (15%- 5%).
On the basis that financial services are consumption expenditure just like any
other services, if interest was subject to VAT and the depositors were VAT
registered vendors, they would charge VAT on the interest for the use of their
money to the bank. The bank would then be entitled to claim an input tax
deduction. Similarly the bank would charge VAT on the interest they charge to the
borrowers. The bank would also charge VAT on any fees and other charges
made. This would bring the institutions on the same footing as any other VAT
registered vendor.
Factually, the depositors will not all be vendors as many will have supplies (that is,
interest) which does not meet the VAT threshold for compulsory VAT registration
which is currently R 1 000 000 in South Africa. Financial institutions will therefore
not pay output tax on the interest charged by the depositors. This is however no
different to any other VAT registered vendor who acquired the goods or services
from a non VAT registered vendor.
Practically, the margin represents a consideration for a bundle of transactions
(deposits and loans), which cannot be easily attributed to individual transactions,
therefore making it difficult to identify the appropriate tax base in such cases.
In addition, the complexity arises in that the interest paid by/to financial institutions
comprises of different elements namely:
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the return to investor/depositor or the real cost of capital;
a factor for inflation to maintain the value of the capital; and
the cost of intermediation.
Arguably, it is only the cost of intermediation element which should be subject to
tax as this is the service provided by the bank. The return on capital and inflation
adjustment should not be subject to tax as this represents savings. (Grubert &
Mackie 2000).
As stated in the VATCOM report however, this argument appeared to approach
the problem from the point of view of the investor rather than the borrower who
consumes the service and bears the tax.
It also seemed to ignore the legal reality that the bank is acting as principal that is,
for its own account as opposed to acting as agent on someone else’s behalf. A
case in point would be where interest is paid to private investors by VAT
registered vendors without the intermediation of a financial institution, such
interest is included in the VAT base. For example, a manufacturer who borrows
money to finance the manufacturing of a stove would cost the interest he pays into
his price which will form part of the VAT base. It therefore begs the question, ‘Why
should the return on capital be excluded from the base merely because it is made
through a financial institution?’ (Marais 1991, p. 29).
If the loans were made available to the final consumers, the final consumer would
bear the VAT which would be consistent with the underlying principles of the SA
VAT Act.
If the interest paid by borrowers were to be taxed, the borrower, where VAT
registered would be entitled to claim an input tax deduction.
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Despite intermediaries being in a position to identify the aggregate value created
(refer to Example 3, the calculated interest margin was 10%), to the extent that
financial services are used by VAT registered persons, the bank will need to
allocate the aggregate value between two sides of the transaction. The borrower
will need to how much of input tax credits it can claim as a deduction.
Example 4: Determining value added for depositor and borrower
In Example 3, the interest paid by the borrower to the bank was 15% and interest
paid to the depositor was 5%. Assuming, a pure interest rate of 12%, the value
added provided to the borrower is therefore (15%-12%) = 3%. The remaining
12%-5% of interest paid to the depositor, i.e. 7 % is now value added to the
depositor. In reality, this split is difficult to perform and hence is the reason for the
exemption (Ebrill et al. 2001).
Advantages:
1. The taxing of financial services in South Africa would eliminate the problem of
double taxation or tax cascading which would arise if services were exempt
and rendered to vendors. The vendor would be entitled to claim back the input
tax credits on its acquisition. It would therefore not cost the unclaimed VAT into
the price of its goods. It will not form part of the VAT base of the final price
charged to consumers. It will eliminate a tax on a tax situation.
2. As the services would now be taxable, banks will be entitled to claim an input
tax deduction on the acquisition of goods or services acquired for the purposes
of making taxable financial services. The decision to vertically integrate
therefore becomes somewhat less of an issue as the banks will potentially not
incur a VAT cost by outsourcing its activities. Banks that already apply vertical
integration, may however continue to do so as structures have already been
established, the vertical integration effect however will be limited going forward.
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3. In many instances, due to the fact that the supply of financial services is now
classified as taxable supplies, it may eliminate the need to apply an
apportionment rate to mixed expenses. If the de minimis threshold is met (that
is, the bank generates taxable supplies of 95 percent or more of the total
supplies), a full input tax deduction is permitted. If an apportionment rate is still
applicable, due to the bank generating other non-taxable supplies, the
inclusion of additional taxable supplies into the numerator of the apportionment
calculation will increase the VAT apportionment rate, resulting in a lower VAT
cost for the bank.
Disadvantages:
As set out in VATCOM (Marais 1991, p.30), there are several practical difficulties
of taxing financial services in South Africa at the standard rate. This includes the
following:
1. The cost of borrowing by private persons for housing, consumable durables
etc. will increase by the full rate of VAT. It could be argued however that the
price of many goods or services also increase by a similar amount and that
there is no reason for the special treatment of financial services.
Exempting financial services from VAT results in consumers and other
unregistered purchasers of exempt services having a lower after-tax cost for
the services because the value added by the exempt service provider will not
be taxed. On the other hand, a VAT registered person who buys exempt
financial services has a higher after-tax cost than if the financial services were
taxable.
As demonstrated by Krever in (Krever ed, p. 36), an example best illustrates
this concept.
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Example 5: Taxing financial services- after tax cost implications for VAT
registered and non VAT registered consumers
A bank charges R 100 for the issue of a derivative instrument. The financial
institutions pays R 3 VAT on its business inputs for example legal costs on the
above issue.
If the banking fee is subject to VAT AT 14%, the bank is entitled to recover the
R 3 input tax on costs incurred in relation to such activity. The customer would
be charged R 114 (R 100 + 14%) for the service performed.
If the customer is a VAT registered person making taxable sales, that person
can claim R 14 input tax as a deduction, resulting in a R 100 after-tax cost for
the service acquired by the VAT registered customer.
If a non VAT registered consumer purchased the same service, similarly he
would be charged R 114. He however would not be entitled to claim the R 14
VAT as a deduction, resulting in a R 114 after-tax cost for the service.
If the banking fee for the issue of a derivative was exempt from VAT, the VAT
registered customer presumably would be charged R 103 (R 100 fee plus R 3
cost incurred with the activity) in order for the bank to recoup the disallowed
input tax of R 3.
The VAT registered customer would not be able to recoup the R 3 VAT buried
in the fee, resulting in a R 103 after-tax cost for the service. This would be R 3
more than as per the taxing option above.
The non VAT registered consumer however would pay the same R 103 for the
acquisition of the financial service, it’s after tax cost being R 11 less than if the
service was taxable.
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It would therefore appear that non VAT registered consumers would prefer the
exempt method to the extent that VAT is not imposed on the value-added by
the financial institutions but registered businesses may prefer the taxable
alternative.
2. The full taxation method will create a strong incentive for disintermediation
particularly in the case of household borrowers. Buyers will bypass the
financial institutions and go directly to the private investor for funds. Financial
institutions will be encouraged to act as agents bringing the non-vendor
investors and private borrowers together as opposed to its current capacity of
acting as principal in the market.
3. The taxation of interest will also increase the number of vendors who will have
to register for VAT where the VAT threshold is met. Depositors or investors
who are often people who are not in business for example widows, pensioners
etc. will now be required to register for VAT in South Africa and will need to
submit VAT returns to SARS. This will place a large administrative burden on
the depositor and furthermore on SARS to manage the process.
4. Additional administrative burden will also be placed on the financial institutions
in order to verify the depositors’ status. Further, as the VAT status of a vendor
could change over time, if regular activity exists with the depositor, it would be
in the best interest of the financial institution to monitor the status on a regular
basis.
In order to claim an input tax deduction, financial institutions will also be
required to obtain tax invoices from the vendor. This will place an additional
documentary compliance burden on the financial institution.
Banks will also need to investigate whether their systems could handle the
storage of large volumes of data and transactions.
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5. The above situation may also provide incentive for investors who are not VAT
registered vendors to have themselves falsely classified as such. As a result,
the investor would receive VAT in addition to the rate of interest. The bank on
the other hand would claim an input tax deduction based on receipt of a
fictitious tax invoice. The VAT paid by the financial institution would not be paid
over to SARS resulting in a loss to the fiscus.
In terms of section 102 of the Tax Administration Act, SARS however places
the burden of proof on the taxpayer to prove that an amount or item is
deductible. Consequently, the bank could be exposed to the risk of penalties
and interest imposed by SARS where input tax claimed was based on receipt
of an invalid/ fictitious tax invoice.
6. The tax will also have to be imposed on existing loans as banks would
otherwise suffer losses. Transitional arrangements will therefore have to be put
in place which will result in additional complexities.
5.2. Zero-rating option: New Zealand
The standard rate of GST in New Zealand is 15 percent.
In the case of financial services, the New Zealand GST Act initially followed the
approach adopted in the UK. It contained a broad range of exempt financial
services. Due to the cascading effect of exemptions, Pallot (2011, p. 312)
commented that ‘the government decided to zero-rate B2B financial services in
order to align the burden of GST in the financial services sector with that
applicable to other business sectors’.
In accordance with New Zealand GST guidelines (Inland Revenue 2004) with
effect from 1 January 2005, the New Zealand zero-rating rules allow financial
57
service providers to elect to zero-rate supplies of financial services to customers
who:
are registered for GST if the level of taxable supplies made by the customer in
a given 12-month period (including the taxable period in which the supply is
made) is equal to or exceeds 75 percent of their total supplies for the period; or
may not meet the 75 percent threshold but are part of a group that does meet
the threshold in a given 12-month period (including the taxable period in which
the supply is made). For example, the treasury or finance function of a group of
companies who receives financial services.
As the supplier has the option to elect to apply the zero-rate or not, if the compliance
costs of zero-rating outweigh the benefits, providers can choose not to elect into the
new provisions.
When establishing whether or not a customer qualifies under the 75 percent test,
all taxable supplies made by the customer should be considered, except for
supplies of financial services that are zero-rated under the new rules. Imported
services that are treated as supplies for the purpose of the ‘reverse charge’ should
also be excluded for the purposes of this test.
Consequently, financial services supplied to another financial services provider
generally cannot be zero-rated because most financial service providers will not
satisfy the requirement that 75 percent of their supplies are taxable supplies.
The New Zealand GST Act however provides for an additional deduction from
output tax in respect of supplies of financial services made to another financial
services provider, who in turn makes supplies to businesses that would qualify to
receive zero-rated financial services. The amount that can be deducted will be
determined by the ratio of taxable to non-taxable supplies made by the recipient
58
financial services provider and is calculated in accordance with a formula which is
discussed later on in this section.
The treatment of financial services supplied to unregistered persons remain
unchanged. Supplies to final consumers in New Zealand are still exempt supplies
and cannot be zero-rated under these guidelines. Input tax cannot be recovered in
respect of supplies to these customers.
Application of guidelines:
Zero-rating
The application of the zero-rating rules requires financial service providers to
know, at a minimum, whether their customer is registered for GST and the ratio of
taxable supplies to total supplies made by the customer. The zero-rating rules
impose a requirement that financial service providers obtain information about
their customers. It is expected that the determination of the taxable status of a
customer will be made by the financial service provider supplying the financial
services.
Identifying eligible customers should be first performed on a transaction-by-
transaction basis. However, as additional costs may arise in meeting the above
requirements, financial services providers may approach the New Zealand Inland
Revenue with the view to using an alternative method to determine whether or not
a customer is registered for GST. Approval of an alternative method will depend
on the level of existing information that the financial services provider holds on its
customers and whether the alternative method provides a fair and reasonable
result.
Whether the customer meets the 75 percent test must be determined either on the
basis of information held by the financial service provider on the customer or by
59
using the Australian and New Zealand Standard Industrial Classification codes
(ANZSIC codes).
If over 50 percent of a provider’s financial services are to qualifying GST-
registered customers, or those supplies together with other taxable supplies
exceed the 50 percent threshold, the provider will be able to deduct 100 percent of
the GST paid on goods and services acquired in making those taxable supplies as
its principal purpose is to make taxable supplies. Adjustments to input tax may be
required to the extent that there are non-taxable supplies.
If however the provider’s principal purpose remains that of making exempt
supplies, it will not be able to deduct 100 percent of the GST paid but may, instead
claim input tax using change-in-use provisions. Such provisions allow a deduction
when goods and services acquired for the principal purpose of making non-taxable
supplies are applied to making taxable supplies.
Financial service providers are encouraged to keep adequate books and records
to substantiate any decisions to zero-rate financial services to customers. It will
also need to undertake regular reviews of any systems and procedures used to
categorise customers. If the financial services provider is aware that a customer
is no longer eligible to receive zero-rated supplies, the zero-rating should cease.
Deductions from output tax
The GST Act provides a further deduction from output tax in relation to supplies of
financial services made to another financial services provider (the direct supplier).
The deduction relates only to exempt supplies of financial services made to the
direct supplier and is limited to the extent that the direct supplier makes taxable
supplies, including supplies of zero-rated financial services, to business customers
that meet the 75 percent taxable supplies threshold. The deduction is calculated
in accordance with the formula below:
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Formula for calculating the deduction for supplies of exempt financial services to
other financial services providers
a x b x d
c e
Where:
a is the total amount in respect of the taxable period that the registered person –
(i) would not be able to deduct under section 20(3); and
(ii) would be able to deduct under section 20(3),
other than under section 20(3)(h), if all supplies of financial services by the financial
services provider were taxable supplies
b is the total value of exempt supplies of financial services made to the direct supplier
in respect of the taxable period:
c is the total value of supplies made in respect of the taxable period:
d is the total value of taxable supplies made by the direct supplier in respect of the
taxable period as determined under section 20D:
e is the total value of supplies made by the direct supplier in respect of the taxable
period as determined under section 20D.
In summary, it is calculated by multiplying two fractions. The first fraction is the
proportion of the total value of supplies made by the provider that consists of
exempt supplies of financial services to a recipient financial services provider (the
direct supplier). The second fraction is the proportion of the total value of supplies
made by the direct supplier that consists of taxable supplies (including zero-rated
supplies of financial services).
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The formula is limited to the activities of the direct supplier. Further supplies of
financial services for example, by the direct supplier to a third or subsequent
financial services provider, are not included in the formula.
The method used to determine the deduction is based on statistical information
that is provided by the direct supplier in relation to its ratio of taxable supplies to
total supplies (items “d” and “e” of the formula). The presentation of this statistical
information can be in the form of a percentage or fraction.
Providers must obtain the ratio from the direct supplier before making the
deduction. If a ratio is not provided, the deduction cannot be claimed.
To claim the deduction, providers are expected to have written notice or other
permanent records of the direct supplier’s ratio of taxable to total supplies. This
written notice can be in the form of an e-mail or letter. If the information is given
by telephone, it must be followed up in writing for evidential purposes. The direct
supplier must also state the period of time for which the ratio applies. If providers
choose to disclose their ratio of taxable to total supplies to other financial services
providers, in addition to providing the ratio in writing, they must maintain a
regularly updated database of those persons that have received that ratio. The
database should also detail the date that the ratio was disclosed and the period to
which it applies. If providers become aware that the disclosed ratio is materially
incorrect they must notify those financial services providers on their database,
advising them to cease using the ratio until a new correct ratio is provided.
Advantages:
1. The tax cascading effect that is integral to exemption is removed where
transactions are zero-rated. Financial service providers are able to claim all
input tax deductions where transactions are zero-rated and as a result, no
irrecoverable VAT is passed on to customers.
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2. In addition, the zero rating option will also eliminate the need for vertical
integration.
3. Although the zero-rating option will not eliminate the need for VAT
apportionment of mixed expenses between taxable and exempt supplies (that
is, the bank will still be required to exempt supplies of financial services where
the required criteria is not met), the zero-rating option will result in a larger
proportion of zero-rated supplies (that is, taxable supplies) being included in
the numerator of the calculation which will have the effect of increasing the
apportionment rate and reducing the VAT cost.
4. As referred to in Chapter 3, the main reasons for exempting financial services
were the difficulties faced in valuing the implicit fees included in the margins.
With the zero-rating option, these difficulties continue to exist however are less
of a concern as it will not affect the supplier’s overall right to deduct input tax. If
financial services were taxed at the standard rate, the supplier would need to
correctly determine the value for each supply.
Disadvantages:
According to the Davis Tax Committee report (Davis 2014, p. 52):
1. To apply the rate of zero percent to financial services supplied to taxable
businesses, the VAT status of each recipient needs to be established and the
level of taxable supplies made by the recipient must be known by the supplier.
This is administratively burdensome to the supplier and is contrary to some of
the basic principles of a VAT system :
that all transactions should be subject to VAT if the supplier is registered for
VAT, irrespective of the status of the recipient of the supply; and
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that all transactions should be subject to VAT with as few exclusions and
exemptions as possible.
It will also place an administrative burden on Revenue Authorities. Due to the
complexity of the system, the inherent risk with the system is heightened. A
process to audit the above system needs to be strictly defined.
2. If zero-rating to certain or all financial services is implemented, perceived
violations of the principles of neutrality may arise. It may be viewed that the
suppliers of financial services will enjoy an advantage over the suppliers of any
other goods or services. As the financial services industry forms a significant
and profitable part of the economy, the decision not to tax the supplies would
be difficult to justify.
3. The zero-rating of financial services may potentially lead to significant VAT
avoidance and would therefore have to be accompanied with anti-avoidance
legislation to avoid aggressive VAT planning. For example: The introduction of
the zero-rate for B2B financial services may result in providers of financial
services over deducting input tax by overvaluing financial services supplied to
such associated parties. In New Zealand, anti-GST avoidance measures were
enforced to ensure that the open-market value of services had to be applied in
such cases.
4. It is also anticipated that there would be a loss of revenue to the fiscus
resulting from the zero-rating of financial services.
With the exempt option, the supplier is not entitled to input tax deductions.
Further the cost is included in the sales prices of assets which when eventually
factored into a supply to the final consumer results in a tax on a tax leading to
the larger collection of revenue for government.
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With the zero-rating option, when applied, tax cascading is eliminated.
Furthermore, the financial service provider is able to claim input tax
deductions. lt is debatable as to whether the financial institutions will pass the
benefit of zero-rating on to consumers in the form of lower charges.
5. The zero-rating option also appears to leave unaddressed the problem of the
under taxation of consumption of financial services by final consumers.
Using Example 5 above:
If the fee charged for issuing a derivative was zero-rated, the VAT registered
customer would be charged R 100 which would represent its after tax cost for
the service (same as the taxable option, R 3 less than the exempt option).
If a non VAT registered consumer purchased the same service, he would be
charged R 100 which would represent its after tax cost for the service, (being R
14 less than the taxable option and R 3 less than the exempt option). Arguably
this service has preference over other taxable/ exempt services consumed by
the final consumer.
As a final note, and echoed by the Davis Tax Committee (Davis 2014, p 52), it is
important to keep in mind that New Zealand’s financial services sector is relatively
small when compared to many other developed countries. It consists of about 20
registered banks with the predominant ownership being Australian. The financial
impact of the combination of the zero-rating rules and the reverse charge
mechanism at the time of introduction, amounted to less than 1 percent of the total
annual refunds made by the New Zealand Inland Revenue. Accordingly, the
impact of the zero-rating system on a larger South African market will need to be
further analysed by means of performing an empirical study.
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5.3. Australia- Reduced input tax credit
The standard rate of GST in Australia is currently 10 percent.
In Australia, the financial supply provisions are not found in the body of the
legislation. Instead, they are set out in a separate Regulations.
As commented by Benedict (2011), the Australian GST system has a very
comprehensive list of supplies which would or would not constitute a financial
supply. The items provided in the list of financial supplies must be read with the
requirements that there should be a ‘provision acquisition or disposal of interest’ in
the said list of specified items. Only supplies made by a financials service provider
qualify within the ambit of financial supplies. Supplies made by a financial supply
facilitator i.e. an entity facilitating the supply of the interest for a financial service
provider do not qualify as a financial service supply.
In the Australian model, a financial acquisition threshold was introduced which had
the effect that if the threshold was not exceeded, the financial institution would be
entitled to claim the total amount of VAT incurred as input tax.
Where the threshold was exceeded, the financial institution is entitled to claim a
fixed percentage of the VAT incurred on specified expenses.
Both instances are further discussed below.
Financial acquisitions threshold (FAT)
FAT applies to input tax relating to acquisitions made in the course of making
financial supplies and has the effect that an entity (meaning a legal entity or
individual) is entitled to full deduction of GST on inputs relating to financial
supplies, if the total input tax (in that month and the preceding 11) that relates to
66
the supplies is less than AUD 50,000 and/ or is less than 10 percent of the total
amount of input tax.
Since, the Australian rules contemplate that a borrowing might be a financial
supply, the threshold has been made more generous and, therefore, more
effective, by excluding from the threshold borrowings that are not entered into for
the purposes of making financial supplies. Therefore, as illustrated by Walpole
(2009, p. 318) ‘A plumber who grants loans to his customers in the form of
granting credit on bills for repairs will not be drawn into the financial-supply regime
merely by reason of giving credit’.
Reduced input tax credits regime (RITC)
If the FAT threshold is exceeded, financial service providers have access to the
RITC rules which allows financial institutions to claim a credit for a stipulated
proportion of the VAT they have paid on inputs, even if such inputs were used to
produce exempt supplies.
According to Davis Tax Committee (Davis 2014, p.47), the RITC scheme allows
suppliers of financial services to claim 75 percent of the GST paid on specified
inputs as listed in the GST regulation. These transactions include the following:
transaction banking and cash management services;
payment and fund transfer services;
securities transactions services;
loan services;
debt collection services;
fund management services;
insurance brokerage and claims handling services;
trustee and custodial services; and
supplies for which financial supply facilitators are paid a commission.
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Advantages:
1. Despite the fact that a financial services institution still makes exempt supplies
of financial services, where a financial services institution is entitled to deduct a
certain amount of input tax, to a large extent it removes the incentive for
vertical integration.
The principal objective of the RITC scheme introduced by Australia was in fact
to eliminate the bias to vertical integration and to facilitate outsourcing from a
cost efficiency perspective.
2. The RITC method therefore provides a degree of neutrality between large
financial suppliers, who have the ability to insource the activity (and hence not
bear GST on this activity when it is performed in house), and those that are
required to outsource the same activity where GST would be charged. All
financial institutions (small or large) are treated equally from a VAT input tax
deduction perspective.
3. It also goes some way to reducing the effect of tax cascading by removing from
the financial supply regime some, indeed significantly large, costs of input tax.
These costs are therefore not passed on to the customers of the financial
supply providers. In addition, many peripheral supplies, associated with
financial supplies without being financial supplies, are kept within the normal
GST regime and do not result in a cascade of tax disguised in pricing.
4. Further, based on the Davis Tax Committee report, the RITC method is
relatively simple to implement and administer as it requires no separation of
taxable from exempt supplies. (Davis 2014, p. 54)
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Disadvantages
1. As commented by de la Feria & Walpole (2009, p. 920):
FAT is, of course, another aspect of the financial institutions’ tax affairs that must be monitored. This will add to further business tax compliance costs. The practical difficulty of this process is exacerbated by the fact that the threshold must be monitored not only currently and having regard to the previous 11 months but consideration must also be given to future acquisitions and an assumptions must be made regarding the input tax credits on financial acquisitions made during the month and the next 11 months.)
2. Further, as pointed out by Hill as being one of the main criticisms of the
Australian RITC scheme the expenses and supplies which will qualify for a
reduced input tax deduction will have to be identified and be regulated which
may lead to many interpretational disputes and ambiguities (Hill 2001).
It would require very clear and detailed invoicing by the supplier, although in
certain instances, it may still sometimes be impossible to disaggregate the fee
for apportionment purposes.
Hill’s problems with apportionment practices were echoed by Edmundson who
commented that the ‘practical application of the RITC rules is littered with
unjustifiable glitches and ambiguities’. (Edmundson 2003)
3. Further, commented by de la Feria & Walpole (2009, p. 924-925), another
apportionment problem that arises is the application of the de minimis rule set
by the FAT. This has attracted criticisms because of the need to monitor
acquisitions and supplies for purposes of the threshold. An acquisition of an
item to be used in part for making some exempt financial supplies and some
taxable supplies might require the entire acquisition to be counted as a
financial acquisition and ‘. . . inadvertently “tip” an entity over the threshold in
circumstances where this was not intended.’
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This area of potential dispute has been cleared up, to a great extent, by the
Australian Taxation Office in a GST Ruling (Australian Taxation Office 2006(3))
which not only describes several acceptable apportionment methods, with an
emphasis on acceptability of direct apportionment methods, but also indicates
that other methods of apportionment will be accepted provided they are fair
and reasonable.
4. The availability of mechanisms in place which allow large scale suppliers of
financial services to claim 75 percent% of its input tax deductions and to allow
those that make minor financial supplies to claim full input tax credits will also
surely result in a cost to the public purse as compared to a system where input
tax credits in relation to the making of exempt financial supplies are denied (de
la Feria & Walpole 2009, p. 928-929).
5. Due to the FAT and RITC method, financial service providers may create
structures and distort the nature or transactions to ensure that meet the
required standard. Anti- avoidance measures will need to be formulated to
address aggressive VAT planning structures.
6. Despite achieving neutrality between small and larger financial service
providers (refer to point 2 under advantages), policy makers will need to
consider the perception that may be created as a result of introducing the RITC
method in the financial services sector on other sectors that offer
predominantly exempt supplies for example the educational services sector,
the transport sectors etc. It may be perceived that a breach in neutrality has
occurred that is why should banks be allowed input tax credits on exempt
supplies when the educational institutions who provide exempt supplies do not
have the same concession? This perception will need to be managed by
authorities.
70
5.4. EU/UK VAT Grouping provisions
In the EU, the VAT law allows for companies which form part of the same group to
register for VAT as a single person.
As set out in the VAT Expert Group’s report to the European Commission (VAT
Expert Group 2015, p. 6-7), in summary, Article 11 to Council Directive (European
Union 2006) sets out the following:
It is an optional provision which gives Member States the freedom to introduce
VAT grouping schemes in their national legislation or not. If not implemented, it
will not be applicable in that Member State, as Article 11 has no direct effect. If
a Member State adopts the provision, it has a significant margin of discretion
over how to implement it. However, the court has set some specific
parameters to it.
VAT grouping arrangements are a ‘fiction’ where a Member State may regard
two or more closely bound persons established in that Member State, as a
single taxable person for VAT purposes. Consequently, in the event of VAT
grouping the members of the VAT group are disconnecting themselves from
their legal form and the way that they do business commercially not only within
the group but potentially also externally and becomes part of a fictitious
(taxable) person for VAT purposes.
The third important feature of Article 11 is its broad application regarding the
notion of ‘persons’, which includes also non-taxable persons. Member States
can ‘restrict the right to belong to a VAT group only ‘provided that they remain
within the objectives of the VAT Directive to prevent abusive practices and
behaviour or to combat tax evasion or tax avoidance’.
71
The fourth important feature is the aspect of territoriality (linked to the principle
of fiscal neutrality), as the members of a VAT group, the ‘persons’, should be
established in the territory of that Member State, so cross-border groupings are
not allowed. However, Member States have in general two types of
approaches to the concept ‘to be established within the meaning of Article 11
of the VAT Directive’. These are:
a broad interpretation, meaning that if a head office (or branch) is member
of a VAT group within their territory, the foreign head office (or branch) is
also considered as being a member of that VAT group. This approach is
adopted in the UK and the Netherlands.
a narrow interpretation which implies that the foreign branch (or head office)
cannot be member of the VAT group. This approach is adopted in Belgium,
Sweden and Germany.
The last feature is the possibility for Member States to implement anti-abuse
measures. Article 11 however does not give further guidance on the
specificities of such anti-abuse measures.
Focusing on the VAT grouping rules in the UK only, in terms of the UK VAT Act
1994, section 43A provides that only corporate bodies, which are established or
have a fixed establishment in the UK are entitled to be members of a UK VAT
group.
In terms of Her Majesty Revenue and Customs (HMRC) guidance provided
(HMRC, VGROUPS02400):
A business is usually regarded as being "established" where the essential
management decisions are undertaken. It is normally the headquarters or head
office.
72
A “fixed establishment” on the other hand is an establishment of business that has
a sufficient degree of structure and permanence in terms of human and technical
resources to enable it provide the services that it supplies.
Consequently, for grouping purposes, a company have a “fixed establishment” in
the UK if:
It has a permanent place of business in the UK, and
that place of business comprises sufficient human and technical resources for
it to carry on its business activities.
A company is not considered to have a “fixed establishment” in the UK for
grouping purposes merely as a result of the fact that:
it has a “brass plate” presence in the UK
it carries on business through a UK agent, or
it has a UK subsidiary.
When an overseas company is included in a UK VAT group, it is that company in
its entirety which is included in the group not just the UK branch or establishment.
This means that any supplies of goods or services between any of the branches or
establishments of the overseas company anywhere in the world and UK based
members of the same group are disregarded for purposes of UK VAT.
A VAT group is treated in the same way as a single taxable person registered for
VAT on its own. The registration is made in the name of a ‘representative
member’. The representative member is responsible for completing and submitting
a single VAT return and making VAT payments or receiving VAT refunds on behalf
of the group. All the members remain jointly and severally liable for any VAT debt.
73
Advantages
1. The effect of the VAT group registration is that supplies of goods or services
between members of the group are ignored for VAT purposes and do not
attract any VAT, thereby eliminating any non-recoverable vat cost on
centralised functions.
2. It eliminates the cascading effect of any non-recoverable VAT cost on
intercompany supplies where financial services are supplied to taxable
consumers.
3. It will also eliminate the need for vertical integration where services are
performed by group entities.
4. VAT grouping also reduces the administration cost associated with the
completion and submission of VAT returns for the entities within a VAT group
that is less VAT returns have to be prepared and filed by businesses, no tax
invoices are required for intra-group transactions which all leads to a lower
compliance cost. Similarly for SARS, the checking of fewer VAT returns will
lead to a lower administrative cost on its side as well.
In term of the comments made by the VAT Expert Group (2015, p. 8):
5. Corporate groups often consist of a variety of legal entities, some in a VAT
payment position and others could be in refund position. The VAT grouping
method allows for a consolidate VAT payment to be made, thereby mitigating
any negative cash flow impacts for businesses and reducing the amount of
refunds and related audits that may arise with tax authorities.
74
6. VAT grouping will also give tax authorities a single point of audit with a clear
picture and good overview of the legal entities that belong to a corporate
group, allowing audits to be efficient and targeted.
7. The VAT grouping method also helps corporate groups to manage VAT and
the associated risks more efficiently for all the legal entities that belong to the
corporate group by making it easier for them to implement consistent internal
risk management procedures, which tax authorities have access to and can
base their audits on.
8. In addition, as set out in the SA VAT Act, current VAT provisions exist with
regards to the timing and valuation rules of supplies made between connected
persons. These rules often raise practical difficulties with taxpayers resulting in
unnecessary assessments being raised by SARS. On the basis that intra-
group transactions could be ignored for VAT purposes, a VAT group is
therefore likely to make fewer errors in this regard.
Further, as set out by Davis Tax Committee (Davis 2014, p.57):
9. As VAT grouping is generally accompanied by joint and several liability of the
individual members of the group for payment of the VAT, VAT grouping will
safeguard the collection of VAT from members of the VAT group for the
Revenue Authorities. As a large quantity of transactions can be taken out of
the scope of the tax, it will allow Revenue Authorities to potentially reallocate
resources to be other priority risk areas.
10. Further, it may prevent avoidance practices where companies are split into
smaller companies with a turnover below the VAT registration threshold to
avoid charging VAT.
75
Disadvantages:
1. Firstly, it will come as no surprise that the enforcement of such provisions may
lead to anti avoidance schemes. Group registration may lead to a higher risk of
tax evasion.
Borselli (2009, p. 380) wrote that:
The application of less detailed accounting rules to intra-group transactions and the absence of direct links between inputs and outputs may lead to fake transactions and, in general, to an unjustified increase of the right to deduct input VAT.
In this regard however, the UK has introduced certain anti-avoidance
measures to limit the risk of tax evasion. In the event that VAT grouping is
considered to be a favourable method of choice, such anti-avoidance
measures must be further reviewed.
2. Other service providers not forming part of a VAT group may view the
implementation of grouping provisions as a violation of the fundamental
principles of neutrality and equity of a VAT system. Why should an entity
providing a similar service not attract VAT due to the nature of the recipient
(that is being a group company) as opposed to the underlying nature of the
service? In terms of the SA VAT Act, VAT should be levied by the supplier
based on the nature of the service or good not based on who the recipient of
the service or good is.
With the implementation of a VAT grouping method, we will potentially see many
new merger/ acquisitions in the market (i.e. the acquisition of more entities into a
group structure) to limit the VAT cost of the financial service provider. Being part of
the same VAT group will result in the transactions between the entities not
attracting VAT.
76
CHAPTER 6: CONCLUSION
In the words of Van Schalkwyk & Prebble (2004, p. 452):
Indeed, neutrality is breached on every level by the exemption of financial services from VAT. Nevertheless, breaches in neutrality alone are not sufficient to justify the abolition of the exemption. The exemption can only be abolished if a replacement that is more neutral than exemption and that maintains a high level of simplicity can be found.
Having regard to Chapter 5, the table below summarizes the advantages and
disadvantages of each method when compared to the exempt method.
Reference to
Chapter
3 5.1 5.2 5.3 5.4
Weakness Exempt
method of
taxing
financial
services
Taxing
financial
services at
standard
rate of VAT
(14%)
Option to
zero-rate
B2B
financial
services
Reduced
input tax
credit
method
VAT
grouping
provisions
Tax Cascading Yes Eliminated
Eliminated/
reduced to a
large extent
(where
zero-rated
supply
criteria not
met)
Reduced
(portion of
VAT cost is
recoverable,
therefore not
included in
sales price to
final
consumer)
Eliminated
to the
extent
where costs
are incurred
with group
companies,
the VAT
cost will not
be included
in sales
77
price to
consumers
Vertical
integration
Yes Eliminated Reduced
(certain B2B
customers
may not
meet criteria
for zero-
rating)
Reduced
Eliminated
to the
extent
where costs
are incurred
with group
companies
Banks incur
significant
irrecoverable
VAT cost
Yes Eliminated
or reduced
to large
extent ( in
cases
where
banks
continue to
receive
income from
other
sources of a
non-taxable
nature)
Reduced to
a large
extent
(Banks will
still incur
exempt
supplies to
persons not
meeting
zero-rating
criteria)
Reduced
(entitled to
claim a fixed
% of credits
against
exempt
supplies,
minor
suppliers may
be entitled to
claim all input
tax credits)
Reduced as
a result of
intra-group
transactions
not
attracting
VAT
Contravention
of basic
principles of
VAT
Yes Appears to
bring banks
on same
footing as
other
vendors
Potential
perceived
violation of
the
principles of
neutrality.
Achieves a
degree of
neutrality
between
small and
larger
financial
institutions
Perceived
violation of
neutrality
and equity.
78
however may
create a
potential
perceived
violation of
neutrality
principles
between
financial
services
sector and
other exempt
supply
sectors for
example the
educational
sector
Administrative
burden leading
to higher
administrative
costs
Yes
For banks,
Revenue
Authority
(Preparation of
complex
apportionment
calculations)
High
For banks,
consumers
and
Revenue
Authority
(more
vendors
being
registered
resulting in
more VAT
return
High
For banks,
Revenue
Authority
(compliance
burden with
zero-rating
criteria,
complex
system)
High:
For banks,
Revenue
Authority
(monitoring
of threshold,
allocation of
input tax
credits
creates
interpretative
difficulties/
ambiguities)
Lower
For banks/
Revenue
Authority
(less VAT
returns
filed, tax
invoices
issued,
creates a
single point
of contact,
facilitates
79
submissions
etc.)
more
efficient
audit).
VAT Avoidance
risk
It is the unfortunate reality that in all options there will be an incentive for
certain parties to develop schemes in order to avoid VAT. It is difficult to
assess the level of risk in each option i.e. low medium or high however it
would be the responsibility of policy makers to ensure that appropriate
measures are put in place with each method.
Examples of
potential
avoidances
risks
Halifax case-
setting up
structures to
claim input tax
credits
Fictitious
creation of
vendors to
collect VAT
which is not
paid over to
SARS
Over-
valuing
financial
services
supplied to
B2B
customers
resulting in
inflated
input tax
deductions.
Creation of
structures
and distorting
the nature or
transactions
to ensure
FAT
threshold is
met or
supplies
qualify for
RITC
The
application
of less
detailed
accounting
rules to
intra-group
transactions
and the
absence of
direct links
between
inputs and
outputs may
lead to fake
transactions
and, in
general, to
an
unjustified
increase of
the right to
80
deduct input
VAT.
Without having done a detailed study of the financial impact, in theory it appears that the
financial impact of alternative methods will be as follows when compared to the exempt
method:
After tax cost
for VAT
registered
consumer
High
(No
deductibility of
VAT credits)
Lower
(VAT cost
not included
in purchase
price)
Lower
(VAT cost
not included
in purchase
price)
Lower
(To a certain
extent, VAT
cost is not
included in
purchase
price)
Lower
(To a
certain
extent, VAT
cost on
group
transactions
are not
included in
purchase
price)
After tax cost
for non VAT
registered
consumer
Low
(Not taxed on
value added)
Higher
(Value
added is
taxed)
Lower
(VAT cost is
not included
in purchase
price)
Lower
(To a certain
extent, VAT
cost is not
included in
purchase
price)
Lower
(To a
certain
extent, VAT
cost is not
included in
purchase
price)
81
Government
collection of
revenue
Input tax
credits not
claimed by
banks.
Additional
revenue
collected from
consumers as
a result of
cascading
Lower
(VAT cost of
banks are
reduced, no
tax
cascading)
Lower
(VAT cost of
banks are
reduced, no/
reduced tax
cascading)
.
Lower
(VAT cost of
banks are
reduced, tax
cascading is
reduced)
Lower
VAT cost of
banks are
reduced,
tax
cascading
is reduced)
From the table above, it is clear that each alternative method has its own advantages and
disadvantages. However in attempt to reduce the effects of tax cascading and vertical
integration, the choice of any alternative method appears to be an improvement on the
current exemption method of taxing financial services in South Africa.
Arguably, taxing financial services at the standard rate of VAT or applying the zero-rate of
VAT to B2B transactions produces the best result in terms of eliminating or reducing tax
cascading and vertical integration. However, the administrative cost and burden that will
be placed on the financial institutions, Revenue Authorities and/ or consumers cannot
simply be ignored. The increase in administrative burden may very well throw an already
complex VAT system into total disarray.
In addition, applying 14 percent VAT to financial services will result in a higher after tax
cost for the final consumer.
82
Although, the Reduced Input Tax Credit method, does not completely eliminate tax
cascading and vertical integration, it does go a long way in reducing the VAT cost of
financial services institutions. It too however, places an additional administrative burden
on financial institutions and Revenue Authorities.
From the above analysis, it is clear that if any one of the first three alternative methods of
taxation had to be implemented, an increase in administrative burden is likely. A cost
benefit analysis will therefore need to be performed in each instance to determine whether
the increased administrative burden is perhaps a small price to pay for the reduced VAT
cost?
With the RITC method further consideration must be made by policy makers regarding:
The determination of a Financial Acquisition Threshold. It needs to be set at the
appropriate level; and
The RITC rate. In Australia, the rate of 75 percent was determined after extensive
consultation with the financial sector and, at that time represented a generous average
rate for the types of acquisitions identified as being eligible for a reduced input tax
credit. Similar discussions and further studies will need to be performed by policy
makers with regards to determining the said rate.
It is however interesting to note that the Australian Treasury released a consultative paper
on 12 May 2009 to which comments were invited, inter alia, on the RITC. The responses
received from the majority of respondents was that the financial supply rules should either
be retained or significantly retained, which seemed to indicate that the Australian financial
sector was relatively satisfied with the GST treatment of financial supplies with regard to
the RITC scheme.
If a reduced administrative burden is of focal point to policy makers, the VAT grouping
provisions appears to tick the box on that front.
83
The VAT grouping provisions however has a limited effect of reducing cascading and
vertical integration in the industry. Similarly, it has a limited effect on the VAT cost burden
of banks.
As a result of the current exempt method, vertical integration has been adopted in many of
the larger banks resulting in the bank providing infrastructure and shared services
functions to other entities in its group. Consequently, the bank in many group transactions
is the supplier of the service or good. By introducing VAT grouping provisions, the result is
that transactions between group companies will not attract any VAT. Theoretically, as
stated in the table above, the VAT grouping provisions should result in a lower VAT cost
for banks as services acquired from group companies will no longer attract VAT. In
practice however, the introduction of VAT grouping provisions may have a limited or no
effect on reducing the VAT cost for banks, where the bank is the supplier rather than the
purchaser in most group transactions.
The extent to which the VAT cost will reduce will need to be further investigated by
performing a study into the various group structures of financial institutions in South Africa
to determine the potential financial impact of applying the VAT grouping provisions.
The Katz Commission VAT Sub-Committee had initially recommended that VAT grouping
should be implemented on a voluntary basis subject to necessary anti-avoidance
provisions. However, the Katz Commission finally recommended that, notwithstanding the
recommendations of the VAT Sub-Committee, the VAT grouping provisions should not be
implemented, principally due to the complexity of such a system.
Perhaps, the perceived violation of the principles of neutrality and equity that is, it would
be unfair and unjustified to treat an entity providing a similar service differently for VAT
due to its recipient not being part of the same group structure, was the influential factor in
the Katz Commission arriving at its decision.
84
With all options considered above, it would appear that the government’s collection in
revenue would decrease in comparison to its collection from the current exempt method.
This revenue gain from the exemption method however is largely derived from cascading
which cannot be said to be a desirable means of raising revenue.
Given that our current economy is facing challenges, it is recommended that a detailed
public finance study is performed to consider the financial impact of each method on the
economy.
As a closing note, the success of any new tax depends on the acceptance of it by the
parties concerned. Throughout the history of tax, we have seen many examples of revolts
against taxes that were considered to be unfair and unjust. Fortunately, we now live in a
democratic society where the government is ruled by the people. It is strongly
recommended that the acceptance levels of the relevant parties concerned must be tested
before any revision in VAT policy is implemented.
85
REFERENCES
7.1. Legislation
Australia- A New Tax System (Goods and Services Tax) Act 1999
Australia- A New Tax System (Goods and Services Tax) Regulations 1999
New Zealand Goods and Services Tax Act 1985
South Africa Income Tax Act 58 of 1962
South African Value-Added Tax Act 89 of 1991
South African Tax Administration Act 28 of 2011
United Kingdom Value-Added Tax Act 1994
7.2. Government Reports
Davis D. (Chairman), 2014, First interim report on Value-Added Tax for the
Minister of Finance
European Union, 2006, Council Directive 2006/112/EC
Katz MM. (Chairman), 1995, Third interim report of the Commission of Inquiry
into Certain Aspects of the Tax Structure of South Africa, Pretoria: Government
Printer
Marais G. (Chairman), 1991, Report of the Value-Added Tax Committee
(VATCOM) Pretoria: Government Printer
SARS, 1991, Explanatory Memorandum on the Value-Added Tax Bill
SARS, 1992, Explanatory Memorandum on the Taxation Laws Amendment Bill
SARS, 1994, Explanatory Memorandum on the Taxation Laws Amendment Bill
86
SARS, 1996, Explanatory Memorandum on the Taxation Laws Amendment Bill
SARS, 1998, Explanatory Memorandum on the Taxation Laws Amendment Bill
7.3. Guides
HMRC, PE3200 - Partial Exemption Special Methods: Sectorisation, viewed on
17 October 2015 from http://www.hmrc.gov.uk/manuals/pemanual/pe3200.htm
HMRC, VGROUPS02400 - Eligibility for VAT group treatment: 'established' and
'fixed establishment', viewed on 06 January 2016 from
http://www.hmrc.gov.uk/manuals/vgroups/VGROUPS02400.htm
Inland Revenue, 2004, GST Guidelines for working with new zero-rating rules
for financial services, viewed on 18 January 2016 from
http://taxpolicy.ird.govt.nz/sites/default/files/2004-other-gst-guidelines-financial-
services.pdf
OECD, 2015, International VAT/GST guidelines, viewed on 13 November 2015
from http://www.oecd.org/tax/consumption/international-vat-gst-guidelines.pdf
SARS, 2015a, VAT 404 Guide for Vendors, viewed 18 December 2015 from
http://www.sars.gov.za/AllDocs/OpsDocs/Guides/LAPD-VAT-G02%20-
%20VAT%20404%20Guide%20for%20Vendors%20-
%20External%20Guide.pdf
7.4. Journals/articles
Benedict K., 2011, ‘The Australian GST regime and financial services. How did
we get here and where are we going?’, eJournal of Tax Research, Vol 9(2) 174-
87
193, viewed on 4 January 2016 from
http://www.austlii.edu.au/au/journals/eJTR/2011/10.pdf
Borselli, F., 2009, ‘A Sensible Reform of the EU VAT Regime for Financial
Services’, International VAT Monitor, October 375-383, viewed on 4 January
2016 from http://www.empcom.gov.in/WriteReadData/UserFiles/file/2009-46.pdf
de la Feria, R. & Walpole M., 2009, “Options for Taxing Financial Supplies in
Value Added Tax: EU VAT and Australian GST Models Compared”, in
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Edmunson P., 2003, ‘GST, financial supplies and reduced input tax credits’, Tax
Specialist, February, Vol 6 No 3, 113-121
Grubert, H. & Mackie, J., 2000, ’Must financial services be taxed under a
consumption tax?’, National Tax Journal, 53(1), 23-40
Hill P., 2001, ‘Characterisation of Supplies’, Australian GST Journal 21
Kerrigan A., 2010, ‘The elusiveness of neutrality – why is it so difficult to apply
VAT to financial services?’, International VAT Monitor, viewed on 18 October
2015 from https://mpra.ub.uni-muenchen.de/22748/1/MPRA_paper_22748.pdf
Pallot, M., 2011, ‘Financial services under New Zealand’s GST’, International
VAT Monitor, September/ October, 310- 315, viewed on 22 January 2016 from
http://empcom.gov.in/WriteReadData/UserFiles/file/No_5%20A-6.pdf
Van Schalkwyk, S. & Prebble J., 2004, ‘Imposing Value-Added Tax on interest
bearing instruments and life insurance’, Asia Pacific Tax Bulletin, December,
viewed on 18 January 2016 from
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1604992
88
VAT Expert Group, 2015, Sub-Group on the topics for discussion- VAT grouping
and judgement in case C-7/13 Skandia America Corp. (USA), European
Commission
Walpole M., 2009, ‘The miraculous reduced input tax credit for financial supplies
in Australia’, International VAT Monitor, September/ October 2011, 316-322,
viewed on 18 January 2016 from
http://empcom.gov.in/WriteReadData/UserFiles/file/No_5%20A-9.pdf
7.5. Books
Beneke, B. & Silver, M. 2015, Deloitte VAT Handbook
Ebrill, LP., Keen, M. & Summers, VP., 2001, The Modern VAT, International
Monetary Fund, Washington D.C.
Krever, R (ed.), VAT in Africa (Pretoria University Press, Pretoria)
Merrill, PR., 1997, ‘Taxation of financial services under a consumption tax ‘, AEI
Press, Washington, DC
Smith, A., 1776, An enquiry into the nature and causes of the Wealth of
Nations, Methuen & Co. Ltd, London
7.6. Internet citations
Oxford University Press, 2016, Oxford Dictionary Online, viewed on 26 March
2016, from http://www.oxforddictionaries.com
Taxation, 2012, Landmark Avoidance Cases, viewed on 26 March 2016, from
http://www.taxation.co.uk/taxation/content/landmark-avoidance-cases
89
7.7. Cases
Halifax Plc v Customs and Excise Commissioners: Case C-255/02 [2006] STC
919
7.8. Industry rulings with Revenue Authorities
Australian Taxation Office, 2006(3), Goods and services tax: determining the
extent of creditable purpose for providers of financial supplies
SARS, 1998, Value-Added Tax: Apportionment formula applying to the Banking
Industry, Reference 28/3/29
SARS, 2007, Banking Services provided and fees which may be charged in
connection with such services
SARS, 2015b, Value-Added Tax: Class Ruling- Members of the Banking
Association South Africa- Application for an alternative method of
apportionment